ANNUAL REPORT 2014
DEUTSCHE OFFICE AT A GLANCE
DEUTSCHE OFFICE AT A GLANCE 2014
20131
CHANGE
105.5
135.1
– 22%
94.2
120.5
– 22%
Earnings before interest and taxes (EBIT)
171.7
– 19.8
Financial result
– 44.0
– 106.8
– 59%
EPRA costs (excluding vacancy costs)
– 14.2
– 20.1
– 29%
13.5
14.9
124.9
– 125.3
0.73
– 0.94
38.5
17.0
> 100%
0.22
0.13
76%
46.6
41.9
11%
0.27
0.31
– 13%
35
34
3%
Investment properties
1,780.7
1,904.1
– 6%
Balance sheet total
1,951.3
2,119.8
– 8%
803.0
707.3
14%
Earnings figures in EUR million (IFRS) and headcount Rental income Net rental income
EPRA cost ratio (excluding vacancy costs)
as a percentage
Consolidated net income Earnings per share
in EUR
EPRA earnings EPRA earnings per share
in EUR
Funds from operations (FFO) FFO per share
in EUR
Headcount (number of employees)2
Balance sheet ratios in EUR million (IFRS)
Equity Equity ratio
as a percentage
41.2
33.4
Net Loan to value ratio
as a percentage
53.5
61.6
803.0
707.3
14%
NAV per share
in EUR
4.45
5.28
– 16%
EPRA NAV per share
in EUR
4.74
5.61
– 16%
EPRA NNNAV per share
in EUR
4.45
5.28
– 16%
as a percentage
6.1
5.9
EPRA net initial yield
as a percentage
5.2
4.7
EPRA "topped-up" net initial yield
as a percentage
5.2
4.9
Vacancy rate
as a percentage
16.4
19.9
EPRA vacancy rate
as a percentage
17.0
18.0
Net asset value (NAV)
Property performance indicators Gross initial yield
1 2
DO DEUTSCHE OFFICE AG
Pro forma As of 1 January
2014 ANNUAL REPORT
KEY PROPERTY FIGURES FIGURES AS OF 31 DECEMBER 2014
51
16.4 PERCENT VACANCY RATE
PROPERTIES IN INVESTMENT PORTFOLIO of which 38 MULTI-TENANT PROPERTIES 13 SINGLE-TENANT PROPERTIES
HAMBURG
BREMEN
898,672
BERLIN
TOTAL LETTABLE AREA
RECKLINGHAUSEN DORTMUND ESSEN DÜSSELDORF NEUSS COLOGNE BONN
109.4
ESCHBORN FRANKFURT/MAIN DREIEICH WEITERSTADT DARMSTADT TRIER
EUR MILLION ACTUAL RENT
ERLANGEN NUREMBERG
KAISERSLAUTERN BRUCHSAL
4.7
YEARS WEIGHTED AVERAGE LEASE TERM
HEILBRONN LUDWIGSBURG
BÖBLINGEN
130.6 EUR MILLION POTENTIAL RENT
STUTTGART FILDERSTADT ISMANING MUNICH
1.8
EUR BILLION MARKET VALUE
CONTENT 02 04 10 16 28 32 39 69 118 119 120 124 134
Letter to the Shareholders Market Strategy and Business Model Portfolio Share 2014 Business Performance, including EPRA Figures Combined Management Report Consolidated Financial Statements for 2014 Audit Opinion Declaration of the Legal Representatives Report of the Supervisory Board Corporate Governance Report Financial Calendar Contact and Imprint
Deutsche Office is a leading office property company with a focus on Germany’s metropolitan regions. Our portfolio consists of 51 properties worth a total of EUR 1.8 billion. We add value through yield-oriented asset management and systematic investments in our portfolio properties. To achieve attractive proceeds from the sale of properties, we take advantage of sales opportunities along the property cycle. Our objective is to increase our portfolio volume to approx. EUR 3 billion in the medium term while continuing to consolidate our leading market position in the process.
ADDING VALUE THROUGH ACTIVE ASSET MANAGEMENT
DO DEUTSCHE OFFICE AG
2014 ANNUAL REPORT
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LETTER TO THE SHAREHOLDERS
WE ACHIEVED OUR GOALS IN 2014 ALEXANDER VON CRAMM AND JÜRGEN OVERATH MEMBERS OF THE EXECUTIVE BOARD
DO DEUTSCHE OFFICE AG
2014 ANNUAL REPORT
LETTER TO THE SHAREHOLDERS
Dear Shareholders, Dear Business Partners, Ladies and Gentlemen,
Deutsche Office achieved a lot in 2014 and created a solid foundation for a successful future in particular. A first milestone was the merger of Prime Office REIT-AG with OCM German Real Estate Holding AG, which became effective in January, followed by the listing of the new company on the stock exchange. This led to the creation of a leading office property company, quoted in the SDAX index, with a focus on metropolitan regions and conurbations in Germany. As a next step, we equipped Deutsche Office with an attractive financing structure, which was achieved in particular by the successfully placed cash capital increase and the refinancing of our Homer and Herkules portfolios. As a result of these measures, we reduced our loan-to-value ratio to less than 55 percent, while at the same time improving the weighted average interest rate to approx. 3.4 percent. With the change of the company’s name to DO Deutsche Office AG in mid-2014, we completed the integration process ahead of schedule. This would not have been possible without the great commitment shown by our employees, and we would like to express our sincere gratitude for their achievements. Along with successfully resolving many issues associated with the merger and the integration process, we achieved a strong letting performance with approx. 170,700 sq.m. in fiscal 2014. The space let in 2014 corresponds to approx. 18 percent of the total lettable area in our portfolio, with new leases accounting for approx. 45,400 sq.m. and lease renewals for approx. 125,300 sq.m. Our high rate of lease-extensions of around 70 percent is clear evidence of our tenants’ satisfaction. 2014 was therefore also a successful fiscal year in operational terms. By consistently leveraging economies of scale, attractive finance costs, as well as a cost leadership position compared with our competitors, we already enjoy strong
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LETTER TO THE SHAREHOLDERS
earning power today. An increase in our letting rate automatically leads to an increase in income, and hence in our Funds from Operations (FFO), an area in which we will continue to attain sustained operational growth in future. In the past fiscal year, we were also successful in selling several properties at a profit. The selling prices reflected our IFRS carrying amounts or were above them. In our view, this shows that the market confirms our property valuation. In fiscal 2014, the rights and obligations for properties worth a total of EUR 125 million were transferred to the new owners. In addition, we have concluded notarized contracts for the sale of three additional properties worth approx. EUR 94 million. In this context, we would like to highlight one transaction which we moved forward in the second half of 2014 and then closed at the beginning of 2015: the sale of the “Westend Ensemble” property in Frankfurt. In a particularly difficult letting market, we were successful in changing the property’s type of use, which enabled us to sell the property without additional investments and to reduce our vacancy rate by 3 percentage points. The market has rated this sale as adding value because it has eliminated our vacancy costs and further improves our financial and liquidity structure. Our financial ratios also developed very positively in 2014: With pro forma revenues of approx. EUR 108 million, Deutsche Office generated Funds from Operations (FFO) amounting to EUR 47 million, which is approx. 11 percent above the previous year’s level. This was above our original guidance of between EUR 44 million and EUR 46 million. In 2014, the FFO per share amounted to EUR 0.27. Based on the share price of approx. EUR 4.00, this leads to an attractive FFO yield of 6.8 percent when compared to our competitors.
LETTER TO THE SHAREHOLDERS
Based on its strong performance in fiscal 2014, Deutsche Office has excellent prospects for developing its business in future. In light of our strong operational performance in fiscal 2014 and our solid basis, we have decided to increase our dividend proposal relative to the original guidance. At the Annual General Meeting, the Executive Board and the Supervisory Board of Deutsche Office will propose that a dividend of EUR 0.15 per share should be distributed for fiscal 2014. This means that we will raise our dividend proposal by EUR 0.04 or EUR 0.05 compared with our original guidance. Furthermore, the Executive Board and the Supervisory Board plan to pay out 50 to 60 percent of our FFO as a dividend in the next few years. Ladies and gentlemen, we will to continue to build on the sound foundation we created in 2014. We will focus on yield-driven asset management of our office properties in metropolitan regions and conurbations, with a particular emphasis on further reducing vacancies. By the end of 2018 the vacancy rate should be under 10 percent. In addition, we will seize opportunities to sell properties in keeping with our active asset management approach in order to generate attractive sales proceeds during the property cycle. At the same time, we will intensively monitor the market in search for attractive purchasing opportunities so as to add value by investing in new properties. Our medium-term objective is to achieve a portfolio volume of approx. EUR 3 billion. Overall, the interest in Germany’s property market is very strong, so that a large amount of capital will continue to flow into the German property market in 2015. We therefore expect that the general price level for office and commercial properties will increase and that these properties will increasingly be in short supply because of the strong interest of investors, also from abroad. In view of intense competition for quality properties, it can be expected that investors will increasingly also invest in B-locations and in locations which are just recovering after market price adjustments. However, we will continue to focus on the multi-tenant segment with shorter leases. This segment is less in the focus of foreign investors.
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LETTER TO THE SHAREHOLDERS
In view of the expected continued growth of Germany’s gross domestic product, as well as increasing employment levels and interest rates which will probably continue to be low, Deutsche Office will operate in a very attractive environment overall. This should be reflected in particular by decreasing vacancies at office locations, a strong letting performance and continuing interest in the German property investment market. For fiscal 2015, we expect rental income from investment properties in a range of between EUR 105 million and EUR 107 million, based on the current portfolio. We plan to increase FFO to at least EUR 50 million in the current fiscal year and to pay out 50 to 60 percent of FFO as a dividend. Ladies and gentlemen, we would like to thank you very much for the confidence you have shown in us and for supporting our sustained growth strategy of high profitability and high dividends.
Sincerely,
Sincerely,
Alexander von Cramm
Jürgen Overath
LETTER TO THE SHAREHOLDERS
EXECUTIVE BOARD JÜRGEN OVERATH
ALEXANDER VON CRAMM
Member of the Executive Board
Member of the Executive Board
Asset, property and letting management, technical management, and acquisitions and sales
Financing, controlling and accounting, investor relations, IT and risk management, compliance, legal and tax
SUPERVISORY BOARD HERMANN T. DAMBACH
UWE E. FLACH
Managing Director of Oaktree GmbH, Frankfurt/Main
Management Consultant
CALEB KRAMER
NEBIL SENMAN
Fund Manager and Managing Director of Oaktree Capital
Co-Managing Partner of Griffin Real Estate Sp. z o.o., Warsaw
EDWARD P. SCHARFENBERG
PROF. DR HARALD WIEDMANN
Attorney at Law
Of-Counsel at Gleiss Lutz Rechtsanwälte, Berlin
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2014 ANNUAL REPORT
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MARKET
GREAT OPPORTUNITIES THE GERMAN OFFICE PROPERTY MARKET CONTINUES TO PROVIDE ATTRACTIVE GROWTH OPPORTUNITIES. BASED ON ITS STABLE PORTFOLIO, DEUTSCHE OFFICE WILL PARTICIPATE IN THIS GROWTH.
DO DEUTSCHE OFFICE AG
2014 ANNUAL REPORT
MARKET
KASTOR TOWER, PLATZ DER EINHEIT 1, FRANKFURT/MAIN
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2014 ANNUAL REPORT
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MARKET DYNAMIC GROWTH OF THE INVESTMENT MARKET FOR COMMERCIAL PROPERTIES AND STABLE PERFORMANCE OF THE OFFICE LETTING MARKETS IN 2014. THE MOST IMPORTANT OFFICE LOCATIONS IN GERMANY
In Germany, the market for commercial properties is dominated by office and retail properties, which account for a share of 44 percent and 22 percent of the transaction volume, respectively. There are different regional and local markets which, in turn, are subdivided according to the properties’ type of use. GERMAN OFFICE PROPERTY MARKET VERY ATTRACTIVE
Hamburg
In 2014, the investment market for commercial properties was very buoyant. Berlin
In 2014, the transaction volume in the German commercial property market increased by 30 percent to EUR 39.8 billion, the best performance since 2007, representing a substantial increase compared with 2013 when the transac-
Düsseldorf
tion volume was still at a level of EUR 30.8 billion. The outlook is also positive Cologne
for 2015; a high transaction volume is expected this year.
Frankfurt
Foreign investors have stepped up their activities in the German commercial property market. In 2014, foreign buyers already accounted for approx.
Stuttgart
50 percent of the investment volume, which was higher than in previous Munich
years. In terms of the total number of bids submitted, international investors accounted for as much as 75 percent. STRONGER DEMAND FOR SECONDARY LOCATIONS In 2013, investments were focused exclusively on top properties at prime locations. In the past year, more and more buyers were willing to invest in properties of somewhat lower quality with a certain level of vacancies or at secondary locations. In Germany’s seven biggest office locations (Berlin, Düsseldorf, Frankfurt, Hamburg, Cologne, Munich and Stuttgart), the transaction volume amounted to EUR 23.0 billion in 2014, i.e. only slightly more than half of the total volume. Frankfurt was number one, with an increase of 34 percent to EUR 5.5 billion, followed by Munich with a volume of EUR 5.0 billion and Berlin with EUR 4.4 billion. Düsseldorf was the only office location among the “Big 7” which saw a decline by 6 percent to EUR 2.1 billion. Office properties once again were the strongest segment with a share of 44 percent in the transaction volume, followed by retail properties, which accounted for a share of 22 percent. The transaction volume of warehousing and logistics properties increased significantly; their share increased from 7 percent in 2013 to 9 percent in 2014.
DO DEUTSCHE OFFICE AG
2014 ANNUAL REPORT
MARKET
NUMBER OF PORTFOLIO TRANSACTIONS INCREASED, PRIME YIELDS DECREASED In the past year, portfolio transactions – i.e. packages including several properties – increased by 57 percent; they accounted for 30 percent of the total volume. A total of 15 of the 20 largest transactions were commercial portfolio transactions. In view of the strong demand, prime yields in the office segment already decreased somewhat. On average, the gross prime yield in the office segment decreased by 4.45 percent, when aggregated over all the “Big 7” cities. All the markets were equally affected by this decline. TRANSACTION VOLUME EXPECTED TO INCREASE FURTHER Overall, prospects for 2015 continue to be positive. Demand by international investors continues to run strong, interest rates remain favourable, and the financing environment continues to be attractive. Leading real estate brokers assume that the transaction volume will increase to above EUR 40 billion. RISING PRICES OF OFFICE PROPERTIES IN SECONDARY LOCATIONS OFFICE SPACE INCLUDING OWNER-OCCUPIERS IN 2014 AND YEAR-ON-YEAR CHANGE
The survey findings of the Ernst & Young Real Estate “Trendbarometer Immo-
IN SQ.M. K
property market is highly attractive. Nearly all the respondents stated that
bilien-Investmentmarkt Deutschland 2015” have confirmed that Germany’s they considered Germany to be an attractive or very attractive location for property investments, and even more so when compared with other Euro-
Berlin
617 +36%
Düsseldorf
particular, are rated more positively than in the previous year, while a stable
324 –22%
Frankfurt
performance is expected for prime locations. The outlook is also positive for retail properties as well as for logistics properties.
378 –14%
Hamburg
pean countries. In the office property segment, secondary office locations, in
525 +19%
OFFICE LETTING MARKET PICKING UP Cologne
261 –13%
Munich
In 2014, the total letting volume of 3.0 million square metres for the seven big641 +3%
gest office locations slightly surpassed the previous year’s volume of 2.9 million square metres. The regional differences were significant. While office
Stuttgart
100
200
300
277 +8%
space take-up increased by 36 percent in Berlin, it fell by 22 percent and by 14 percent in Düsseldorf and Frankfurt, respectively.
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2014 ANNUAL REPORT
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MARKET
Take-up also increased in Hamburg, Stuttgart and Munich. The letting volume is expected to grow in 2015 due to the continued strength of the labour market, in particular in the services sector, which is particularly relevant for the office market, along with the high potential of expiring leases. VACANCIES AT LOWEST LEVEL 2002 Vacancies in Germany’s seven most important office locations dropped to a new all-time low in 2014: Vacancies fell to 6.8 million square metres at the end of 2014, compared with 7.3 million square metres at the end of 2013. This corresponds to a vacancy rate of 7.6 percent – 0.6 percentage points less than one year ago, and at the same time the lowest level since 2002. Both the vacancy volume and the vacancy rate decreased at all the top office property locations, most significantly in Hamburg, where the vacancy rate fell by more than 12 percent to 6.8 percent. At 5.2 percent, however, Stuttgart had the lowest vacancy rate of the seven biggest office locations. VACANCIES INCLUDING INCLUDING SUB-LET SPACE
Q4 2014 SQ.M.
Berlin Düsseldorf
Q4 2013 RATIO (%)
SQ.M.
RATIO (%)
1,305,200
7.7
1,395,400
8.2
994,600
10.9
1,022,800
11.4
1,253,100
10.4
1,327,400
11.1
Hamburg
997,800
6.8
1,137,100
7.8
Cologne
490,000
6.5
530,000
7
Munich
1,327,000
6.6
1,456,900
7.3
440,000
5.2
445,000
5.3
Frankfurt/Main
Stuttgart
NEW-BUILD COMPLETIONS IN 2014 AND YEAR-ON-YEAR CHANGE
VACANCIES WILL CONTINUE TO FALL DUE TO RELATIVELY
IN SQ.M. K
In 2014, the volume of new-builds, which totalled 988,000 square metres,
LOW VOLUME OF NEW-BUILDS increased by 11 percent compared with 2013. The expected increase of 20 percent was not achieved because, in the fourth quarter, some tenants occupied
Berlin
new office space later than planned. The lower growth of completions had a
124 +20%
Düsseldorf
positive impact on vacancies at the end of 2014. The fact that nearly 80 per-
148 +127%
Frankfurt
cent of all new buildings were already let or assigned to owner-occupiers at the 300 +47%
Hamburg
time of their completion was as well positive. The regional focus of construction activities was clearly on Munich and Frankfurt; these markets accounted
116 –26%
for more than half of the new-build volume. For 2015, Jones Lang LaSalle (JLL) Cologne
24 –79%
Munich Stuttgart
expects a new-build volume of just above 1.0 million square metres, which is 204 +10%
60
DO DEUTSCHE OFFICE AG
73 +18%
2014 ANNUAL REPORT
only marginally higher than in 2014.
MARKET
HAUPTSTRASSE 45 / SCHULSTRASSE 1 + 3 / PESTALOZZISTRASSE 1 + 1A, DREIEICH
UPWARD TREND IN PRIME RENTS CONTINUES Due to the slight increase in demand, prime rents rose by 0.6 percent. The highest growth rates were observed in Hamburg (+ 2.1 percent to EUR 24.50), Munich (+ 4.8 percent to EUR 33.00) and Stuttgart (+ 2.7 percent to EUR 19.00). In Düsseldorf, however, the prime rent decreased by 5.5 percent to EUR 26.00. Overall, JLL expects another moderate increase in prime rents in 2015.
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2014 ANNUAL REPORT
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STRATEGY AND BUSINESS MODEL
MAARWEG-CENTER MAARWEG 165, COLOGNE
DO DEUTSCHE OFFICE AG
2014 ANNUAL REPORT
STRATEGY AND BUSINESS MODEL
SOLID THE BUSINESS MODEL OF DEUTSCHE OFFICE IS BASED ON THREE PILLARS FOR SUSTAINABLE SUCCESS: ACTIVE ASSET MANAGEMENT, PROPERTY PURCHASES, AND PROPERTY SALES. ON THIS BASIS, WE WILL FURTHER CONSOLIDATE OUR MARKET POSITION AS A LEADING OFFICE PROPERTY COMPANY.
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2014 ANNUAL REPORT
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STRATEGY AND BUSINESS MODEL
STRATEGY AND BUSINESS MODEL OUR MEDIUM-TERM OBJECTIVE IS TO INCREASE OUR PORTFOLIO TO APPROX. EUR 3 BILLION, WHILE CONTINUING TO STRENGTHEN OUR MARKET POSITION. A LEADING OFFICE PROPERTY COMPANY IN GERMANY We focus in our business activities on yield-driven management of office prop-
THE CORE OF OUR BUSINESS ACTIVITIES
erties in Germany’s metropolitan regions (“Big 7”) and conurbations. Forecasts
is yield-driven management of office properties
suggest that these markets will enjoy a particularly favourable development.
PART OF OUR STRATEGY
Our activities concentrate on optimising the leased properties we offer in line
is acquiring properties with the potential for value growth
with tenants’ needs to meet their specific expectations. Because of the high
and making value-adding investments in the properties in
degree of tenant satisfaction, we have a significant proportion of lease renew-
our portfolio.
als (with a rate of around 70 percent), and we are consistently and sustainably
IN ADDITION we will seize opportunities to sell properties during the property cycle in order to generate attractive sales proceeds and capitalise on value added.
reducing the current vacancies in our portfolio. We will continue to grow profitably through the acquisition of properties with a potential for value growth and through other value-adding investments in our property portfolio. In addition, we take advantage of sales opportunities to generate attractive proceeds from sales within the property cycle and to capitalise on the value added. SOLID FOUNDATION FOR SUSTAINABLE SUCCESS Deutsche Office’s business model is based on three pillars: • Active asset management: The core of active asset management is to conclude new lease and lease renewals to reduce the vacancies in our properties or, in other words, to ensure that all our properties are fully let at all
POTENTIAL RENT
times. The properties let by our company and the services we provide stand
EUR 130.6 MILLION
apart from what our competitors have to offer in comparable locations and in properties of a similar quality. We optimise our properties in accordance with our tenants’ needs, maintain close contacts with our tenants and are
Compared with today’s actual rent of EUR 109.4 million, the potential rent of our portfolio amounts to EUR 130.6 million – an attractive internal potential for adding value.
eager to meet their specific expectations. This has led to a high degree of tenant satisfaction. In addition, we benefit from extensive networking with decision-makers in our sector. As a result, we have been successful in ensuring lease renewals and in reducing vacancies. This strategy is underpinned by value-adding investments in our property portfolio.
DO DEUTSCHE OFFICE AG
2014 ANNUAL REPORT
STRATEGY AND BUSINESS MODEL
• Property purchases: Our objective is to further expand our portfolio with a solid financing structure and a conservative loan-to-value ratio of between 50 and 55 percent. We monitor the market to be able to seize attractive opportunities for acquisitions. In property purchases, we focus – in line with our existing portfolio – on conurbations and locations in which we are able to achieve significant value growth from leases and/or from reducing vacancies. Additional criteria for acquisitions are: properties intended for use as offices, possibly with a subsidiary proportion of other types of use, a multitenant structure and an investment volume of between EUR 15 million and EUR 50 million for single properties and over EUR 100 million for portfolios. • Property sales: We see ourselves as property portfolio managers and regard our properties therefore predominantly as long-term investments or socalled “hold assets”. At the same time, however, we seize sales opportunities to realize profits and to make new investments. In recent years, we have sold various stabilised properties, achieving prices that were regularly higher than the IFRS book values. In this way, we achieve attractive yields and optimise our portfolio by selling properties and/or locations that no longer fit in with our strategic focus or for which we expect no further value growth.
PROPERTY CLASSIFICATION OF DEUTSCHE OFFICE
ACTIVE ASSET MANAGEMENT
Properties with vacancies which offer the potential for adding cash flow and value
HOLD ASSETS
CAPITAL REDEPLOYMENT ASSETS
Properties with attractive, stable rental income
Utilising attractive sales opportunities to generate profits or to sell locations outside our strategic focus
Active asset management to add value in the current and future portfolio
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2014 ANNUAL REPORT
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STRATEGY AND BUSINESS MODEL
Between 20 and 25 percent of our portfolio is comprised of properties with potential for value growth, so-called “active-management properties” or repositioning properties. We optimise them, reduce vacancies, and thereby leverage their potential for value growth. Subsequently, we reclassify them as hold assets or we offer them for sale, so that the capital tied up can be released for the acquisition of further properties with potential for value growth. In this way, we have a guarantee of a continuous, value-adding rotation of properties. REGULAR PORTFOLIO REVIEW CREATES FLEXIBILITY We perform a regular review of our property portfolio and analyse whether the properties should continue to be classified as hold assets, repositioning properties or potential properties for sale. We carry out revitalisation, conversion and enhancement measures on the assets we classify as repositioning properties. In addition, we reduce vacancies, and thus improve their valuation potential. Subsequently, these properties are classified as hold assets or marketed as potential properties for sale. THOROUGH REVITALISATION OF “AM SEESTERN 1” PROPERTY IN DÜSSELDORF One example of a successful revitalisation project is the “Am Seestern 1” property in Düsseldorf. In December 2014, we completed extensive conversion and modernisation measures. “Am Seestern 1” is a modern landmark building in a prime infrastructure location, due to the very good transport facilities in Düsseldorf’s Seestern district. The building, which has a lettable area of approx. 36,100 square metres and a big underground car park with 714 parking spaces, has been awarded the “BREEAM DE Bestand” sustainability certificate. It includes modern, well-equipped step-free rental units of between 460 square metres and a maximum of 2,710 square metres on each floor, characterised by highly efficient use of space and cost-effectiveness. Following comprehensive revitalisation, especially in and around the lobby and the atrium, the property has
WALT
been placed on the market for the conclusion of new leases, also including
4.7 years
leases for small units.
WALT stands for Weighted Average Lease Term. With a WALT of 4.7 years, our portfolio is perfectly matched with our financing structure.
It is our declared intention to expand our portfolio to a volume of approx.
FURTHER EXPANSION OF OUR MARKET POSITION EUR 3 billion in the medium or long term and to continue to strengthen our market position as a leading office property company in Germany. In addition, we want to play an active part in consolidating the German office property sector in the coming years.
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2014 ANNUAL REPORT
STRATEGY AND BUSINESS MODEL
MULTI-TENANT
We are building up a sustainably strong portfolio in terms of both yields and dividends, with which we will be able to leverage the value-adding potential
38 properties
of properties in different yield and risk classes.
or approx. 75 percent of our properties have a multi-tenant structure with tenants from different sectors and with different lease terms.
sectors and a weighted average lease term of around five years, we are gen-
Due to our predominant multi-tenant structure, with tenants from different erating stable rental income, which will be the basis for growing cash flows, high and growing profitability and sustainable dividend potential. Currently, our loan-to-value ratio is below 55 percent, and the average interest rate is down at 3.4 percent. The fact that interest and financing levels have fallen yet again will provide opportunities for us to reduce the interest rate further. GROWING IMPORTANCE OF OFFICE RENTAL SPACE WITH SUSTAINABILITY CERTIFICATES A total of approx. 228,000 square metres of lettable space – i.e. roughly 24 percent of our total portfolio – is in properties which have been awarded sustainability certificates, such as the LEED certificate (U.S. Green Building Council), the BREEAM certificate (BRE Environmental Assessment Method) and the DGNB certificate (Deutsche Gesellschaft für Nachhaltiges Bauen – DGNB e.V.). Seven of our properties have so far been awarded such certificates, and further properties are currently going through the certification process or are scheduled for certification in the near future. However, obtaining sustainability certificates for leased properties is not an end in itself because sustainability is becoming more and more important for some of our tenants. SUSTAINABILITY CERTIFICATE FOR KASTOR TOWER KASTOR TOWER, an office building in Frankfurt/Main with an impressive glass façade and built in an architectural style of timeless elegance, was awarded the LEED Gold certificate by the U.S. Green Building Council in August 2014. The office tower scored particularly well under the headings of “energy and atmosphere” and “indoor climate”. The 24-storey building on “Platz der Einheit” has a total lettable area of 30,630 square metres and 344 parking spaces in its underground car park. KASTOR TOWER was certified under the LEED procedure for existing buildings and achieved a much higher score than the minimum required for the gold certificate in all categories: sustainable site, water efficiency, energy and atmosphere, materials and resources, indoor climate, innovative operation and regional priorities.
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2014 ANNUAL REPORT
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PORTFOLIO
WELL POSITIONED FOR THE FUTURE WITH ITS STABLE AND WIDELY DIVERSIFIED PORTFOLIO, DEUTSCHE OFFICE IS WELL POSITIONED FOR THE FUTURE, BASED ON AN ATTRACTIVE AND LONG-TERM FINANCING STRUCTURE.
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2014 ANNUAL REPORT
PORTFOLIO
INGERSHEIMER STRASSE 20, STUTTGART
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PORTFOLIO
PORTFOLIO DEUTSCHE OFFICE HAS A STABLE AND WIDELY DIVERSIFIED OFFICE PROPERTY PORTFOLIO IN GERMANY WITH AN ATTRACTIVE POTENTIAL FOR VALUE GROWTH. KEY PORTFOLIO INDICATORS
Property portfolio at 31 December (number) Assets held for sale (number) Investment properties (number) Fair value (in EUR million) Net (annual) income from rent roll (in EUR million)1 Gross initial yield (as a percentage) Lettable space (in square meters) Vacancy rate (as a percentage of lettable space)
2014
PRO FORMA 2013
CHANGE
54
60
– 10 %
3
3
0%
51
57
– 11 %
1,781
1,904
–6%
109
112
–3%
6.1
5.9
898,672
951,790
16.4
19.9
–6%
4.7
5.0
–6%
Average value per square metre (in EUR)
1,981
2,001
–1%
Average rent per square metre (in EUR/month)
10.15
9.81
4%
WALT (in years)
1
Annualized
PORTFOLIO CHANGES IN EUR K
Investment properties as of 1 January 2014 (pro forma) Reassessment on first-time consolidation Investments of which refurbishments of which tenant-specific improvements of which agent fees/marketing Valuation result Transactions
– 25,562 20,359 11,843 6,108 2,407 – 5,612 – 111,489 – 18,689
of which reclassified as “assets held for sale”
– 92,800
Investment properties as of 31 December 2014
2014 ANNUAL REPORT
1,904,110
of which disposals
Rent smoothing
DO DEUTSCHE OFFICE AG
2014
– 1,146 1,780,660
PORTFOLIO
STABLE, WIDELY DIVERSIFIED PORTFOLIO OF OFFICE PROPERTIES IN GERMANY Our nation-wide office property portfolio is characterised by a widely diverse tenant base with a strong credit standing. The properties we manage are mainly located in Germany’s metropolitan regions (“Big 7”) and major conurbations, primarily in the western part of Germany where market prospects are particularly favourable. The tenant structure is spread across different sectors, securing the basis for stable rental income and high yields. In addition, our property portfolio has the potential to generate significant value combined with adequate risk diversification, which the Deutsche Office management platform has complemented with attractive cost structures and a solid financing structure in order to create sustainable dividend potential. Deutsche Office’s property portfolio, currently comprises 51 properties with a market value of approx. EUR 1.8 billion and total lettable space of approx. 900,000 sq.m. With more than 550 lease contracts under management and a weighted average lease term of 4.7 years, we earn an annual net income from rental contracts of EUR 109 million. This generateds a gross initial yield of approx. 6.1 percent and a net yield of 5.1 percent at 31 December 2014. At the close of 2014, EPRA net yield was 5.2 percent, and the EPRA vacancy rate was 17 percent. FOCUS ON OFFICE USE AND THE WESTERN REGION OF GERMANY
TYPE OF USE OF OUR PORTFOLIO (BASED ON ANNUAL NET RENTAL INCOME)
Offices accounts for about 84 percent of the portfolio. Three properties have 3% Logistics
4% Retail
2% Hotel
been leased to operate as nursing homes. About 4 percent is taken up by the retail trade and 3 resp. 2 percent by logistics and hotels. Our regional focus is on the “Big 7”, the seven biggest office locations in Germany, and on the metropolitan areas. A total of 50 of the 51 properties we
7% Nursing home
currently own are in the western part of Germany, in particular Düsseldorf, 84 % Office
Frankfurt and Stuttgart. One major complex – Treptowers – is in Berlin. The vast majority of our properties are located in towns with a population of more than 100,000.
DO DEUTSCHE OFFICE AG
2014 ANNUAL REPORT
19
PORTFOLIO
TENANT BASE BY SECTOR (BASED ON ANNUAL NET COLD RENT)
Other 12 %
n Ba
Pu bl ic Ho se te ct l Com or 2 % pute 3 rs & R elec etail 3 % tron ics 4 % % Health & pharmaceuticals 10 %
1 ks %
nce 23 % Insura
s on ati nic mu om lec Te
vices 13
%
%
18
1%
e1 tat es l a Re
Busin ess s er
20
ATTRACTIVE MULTI-TENANT STRUCTURE AND PROMISING SECTORS Another advantage of our property portfolio is its tenant structure: 75 percent of our properties are already multi-tenant. 25 percent of our properties have so far had only one tenant or else a dominant principal tenant. Most of the properties have been let to more than five tenants – and with about 550 leases under management and tenants from different sectors, there is wellbalanced diversification. Approx. 23 percent of our net income from basic rent is generated with companies from the insurance sector, 18 percent with companies in telecommunications industry, and 13 percent with service companies. BALANCED PORTFOLIO WITH A LONG-TERM FINANCE STRUCTURE After completing the refinancing for our Homer and Herkules portfolios in Q1/2014 and bringing forward the repayment of several relatively expensive financing programmes, we have put in place an attractive finance structure with a weighted average term to expiry on our loans of approx. 4.2 years and an average interest rate of currently approx. 3.4 percent. The continuing fall in the interest rate combined with our selected interest rate hedges have further boosted earnings. Moreover, we now have opportunities to cut our interest expense further.
DO DEUTSCHE OFFICE AG
2014 ANNUAL REPORT
PORTFOLIO
SUSTAINABLE LETTING PERFORMANCE In fiscal year 2014, we achieved a letting volume of approx. 170,700 sq.m., or 18 percent of the total lettable space in our portfolio. New leases accounted for about 45,400 sq.m., while 125,300 sq.m. were re-let to existing tenants. In the past year, we continued to pursue our successful letting strategy. Among the new leases, for example, a 5-year lease was secured with the Free State of Bavaria for approx. 3,400 sq.m. of space in the “Sigmund-Schuckert-Haus” property in Nuremberg, and a 10-year lease for approx. 1,400 sq.m. in the KASTOR-Tower property in Frankfurt. Other successful transactions include a 6-year lease with the Federal Institute for Materials Research and Testing for approx. 1,200 sq.m. in the “Heerdter Lohweg” property in Düsseldorf and lets amounting to approx. 4,900 sq.m. in Neuss to tenants such as Emerson and 3M. In November, we concluded an agreement for a total of 5,200 sq.m. at our “Feldstrasse/Gutenbergstrasse” property in Weiterstadt with a
WESTEND ENSEMBLE, FRANKFURT SUCCESSFULLY SOLD IN JANUARY 2015
DO DEUTSCHE OFFICE AG
2014 ANNUAL REPORT
21
22
PORTFOLIO
major German logistics company. As a result, the lettable space in this property has now been fully rented. Our office building on Martinistrasse/Balgebrückstrasse in Bremen has now also been fully let after concluding a five-year agreement for a space of 1,375 sq.m. The same applies to the ARCUS in Neuss Hammfeld, where just over a year ago, on 31 December 2013, the occupancy rate was 41 percent. In December 2014, we achieved full occupancy status by signing an agreement for the last available space – a considerable accomplishment for the year 2014, when a total of approx. 7,500 sq.m. of space was let to various tenants. We have been similarly successful with our lease renewals. Zurich Insurance extended a lease for another six years at the “Olof-Palme-Strasse” property in Frankfurt and also took on the last remaining units in the property, so that the lettable space of around 10,400 sq.m. is now fully under contract. In addition, renewals were concluded ahead of expiry with DPD in Ludwigsburg for approx. 17,000 sq.m. of storage and office space over another ten years and with Deutsche Telekom (GMG) for approx. 13,700 sq.m. of office and storage space at the “Heerdter Lohweg” poperty in Düsseldorf. Early renewals were likewise signed in Bonn, where BDO, Itenos and a law firm will continue to rent a total of approx. 5,800 sq.m. of our “Potsdamer Platz” property. 2015 also offers potential for new and renewed leases. At the close of 2014, with a total of approx. 900,000 sq.m. of lettable space in our portfolio, the vacancy rate in square metres was 16.4 percent. The EPRA vacancy rate, which is the vacancy rate based on market rents, was 17 percent. VACANCY CHANGES SPACE SQ.M.
VACANT SQ.M.
IN %
Investment properties at 1 January 2014 (pro forma)
951,790
189,406
19.9
Space sold
72.8
– 53,122
– 38,672
of which disposals
– 11,944
– 539
4.5
of which reclassified as “assets held for sale”
– 41,178
– 38,134
92.6
–
– 3,352
Letting result Expiry after renewal
–
52,105
New leases beginning in 2014
–
– 55,457
Space adjustment Investment properties at 31 December 2014
DO DEUTSCHE OFFICE AG
2014 ANNUAL REPORT
4
0
898,672
147,382
16.4
PORTFOLIO
EPRA VACANCY RATE 2014
PRO FORMA 2013
CHANGE
Estimated rental income based on stabilised occupancy rate1
124,780
125,986
–1%
Estimated rents for vacant space1
21,226
22,676
–6%
EPRA vacancy rate
17.0 %
18.0 %
EPRA VACANCY RATE
IN EUR K (UNLESS OTHERWISE STATED)
17.0 % The EPRA vacancy rate valuates the vacancies of the property portfolio based on the market rent. Deutsche Office reduced the EPRA vacancy rate to 17 percent.
1
Based on market rent determined by appraiser (EUR k p.a.)
SUCCESSFUL PROPERTY DISPOSALS OF OVER EUR 153 MILLION AS PART OF SUSTAINED PORTFOLIO OPTIMISATION The properties in our portfolio are regularly reviewed from a strategic perspective. Between January 2014 and January 2015, we sold seven properties under attractive terms with a sales volume of approx. EUR 146 million. The properties selected had either been stabilised and sold at a profit, or they were nonstrategic properties which were sold to streamline our portfolio. The “Westend-Ensemble” property in Frankfurt/Main, which had been vacant for several years, was prepared for conversion to residential use in 2014. It was
REGIONAL DISTRIBUTION OF THE PORTFOLIO (BASED ON LETTABLE AREA IN SQ.M.)
then sold through a bidding process to a private consortium. The contract was signed in January 2015. The sale reduced the vacancy rate by 3 percent-
21 % Other 2% Hamburg
age points, which also led to a significant reduction of the vacancy costs. In addition, it has improved our capital structure and our liquidity. 20 % Düsseldorf
The properties in Leipzig, Essen and Cologne were sold after new leases or
4% Munich 6% Essen
long-term renewals had been successfully signed. The property in Frankfurt/ 14 % Frankfurt
6% Cologne
that lets apartments, was sold for strategic reasons to optimise our portfolio. Overall, the sale of these five properties has resulted in slight gains in book value – an external endorsement of the market values attributed to
6% Stuttgart 9% Berlin
Main, where we sold a vacant office building on Gutleutstrasse to a company
our properties. 12 % Darmstadt
DO DEUTSCHE OFFICE AG
2014 ANNUAL REPORT
23
24
PORTFOLIO
PORTFOLIO OVERVIEW CBRE VALUATION REPORT – DO DEUTSCHE OFFICE AG PORTFOLIO – 31 DECEMBER 2014 CITY
ADDRESS
LETTABLE AREA
WALT
TOTAL (SQ.M.)
VACANCY RATE (PERCENT)
(IN YEARS)
Berlin
An den Treptowers
84,632
0.1
4.4
Böblingen
Hanns-Klemm-Strasse 45
14,888
0.0
2.5
Bonn
Potsdamer Platz 5
10,382
14.5
6.9
Bremen
Balgebrückstrasse 13 – 15
4,081
3.1
3.7 4.5
Bremen
Lötzener Strasse 3
4,953
11.9
Bruchsal
Vichystrasse 7 – 9
20,159
69.3
6.5
Darmstadt
Deutsche-Telekom-Allee 7
24,686
0.0
5.4
Darmstadt
T-Online-Allee 1
72,528
0.0
4.9
Darmstadt
Wilhelminenstrasse 25/ Elisabethenstrasse 20 – 22
8,461
13.4
2.6
Dortmund
Kampstrasse 36/ Petergasse 2
3,162
29.7
3.9
Dreieich
Hauptstrasse 45/Schulstrasse 1+3/ Pestalozzistrasse 1+1A
Düsseldorf
Am Seestern 1
Düsseldorf
8,109
4.7
12.7
36,079
79.3
0.4
Gartenstrasse 2/ Kaiserstrasse 48 – 50
5,059
15.6
3.7
Düsseldorf
Graf-Adolf-Strasse 67 – 69
5,247
30.9
3.2
Düsseldorf
Heerdter Lohweg 35
37,691
26.2
3.0
Düsseldorf
Immermannstrasse 65
22,010
7.2
4.2
Erlangen
Nägelsbachstrasse 26/ Nürnberger Strasse 41
11,595
0.0
2.0
Eschborn
Frankfurter Strasse 71 – 75
6,723
0.0
7.3
Eschborn
Mergenthaler Allee 45 – 47
5,079
59.5
0.5
Essen
Alfredstrasse 234 – 238
30,314
0.0
5.0
Essen
Opernplatz 2 etc.
24,531
0.0
8.0
Filderstadt
Kurze Strasse 40/ Hornbergstrasse 45
5,264
21.9
1.9
Frankfurt/Main
Am Hauptbahnhof 6/ Münchener Strasse 56
Frankfurt/Main
Berner Strasse 119
Frankfurt/Main
Eschersheimer Landstrasse 55
Frankfurt/Main
Platz der Einheit 1
Frankfurt/Main
Olof-Palme-Strasse 37
10,423
Frankfurt/Main
Solmsstrasse 27 – 37
Frankfurt/Main
Westerbachstrasse 162 – 166
DO DEUTSCHE OFFICE AG
2014 ANNUAL REPORT
7,700
7.2
5.7
14,852
33.5
4.1
8,722
46.7
4.4
30,630
75.2
4.0
0.0
6.0
29,759
0.0
3.0
5,873
10.2
4.7
PORTFOLIO
(ANNUAL) GROSS RENTAL INCOME
MARKET VALUE
GROSS INITIAL YIELD
GROSS RENT MULTIPLIER
ACTUAL (EUR/P. A.)
POTENTIAL (EUR/P. A.)
TOTAL (EUR)
EUR/SQ.M. (EUR)
ACTUAL (PERCENT)
POTENTIAL (PERCENT)
ACTUAL
POTENTIAL
14,230,944
14,230,944
228,200,000
2,696
6.2
6.2
16.0
16.0
1,896,696
1,896,696
23,000,000
1,545
8.3
8.3
12.1
12.1
1,516,176
1,710,708
22,400,000
2,084
6.8
7.6
14.8
13.1
325,140
335,052
3,700,000
907
8.9
9.1
11.4
11.0
311,520
358,140
3,500,000
706
8.9
10.2
11.2
9.8
536,160
1,269,960
12,900,000
640
4.2
9.8
24.1
10.2
3,469,680
3,469,680
52,400,000
2,123
6.6
6.6
15.1
15.1
12,040,368
12,040,368
170,700,000
2,354
7.1
7.1
14.2
14.2
1,246,332
1,424,784
22,600,000
2,671
5.5
6.3
18.1
15.9
520,872
627,048
9,900,000
3,130
5.3
6.3
19.0
15.8
1,343,028
1,408,296
20,500,000
2,528
6.6
6.9
15.3
14.6
717,084
4,945,092
59,500,000
1,649
1.2
8.3
83.0
12.0
843,684
948,012
12,100,000
2,392
7.0
7.8
14.3
12.8
425,088
600,756
7,400,000
1,410
5.7
8.1
17.4
12.3
4,539,924
5,975,724
80,700,000
2,141
5.6
7.4
17.8
13.5
3,605,352
3,826,584
59,200,000
2,690
6.1
6.5
16.4
15.5
1,467,528
1,467,528
18,800,000
1,621
7.8
7.8
12.8
12.8
1,169,076
1,169,076
17,200,000
2,558
6.8
6.8
14.7
14.7
236,172
599,700
5,800,000
1,142
4.1
10.3
24.6
9.7
5,664,624
5,664,624
74,300,000
2,451
7.6
7.6
13.1
13.1
2,556,408
2,556,408
36,100,000
1,472
7.1
7.1
14.1
14.1
485,160
606,636
6,400,000
1,216
7.6
9.5
13.2
10.5
1,424,556
1,533,024
23,100,000
3,000
6.2
8.9
16.2
15.1
1,300,824
1,872,372
21,100,000
1,421
6.2
8.9
16.2
11.3
1,532,388
2,377,956
28,600,000
3,279
5.4
8.3
18.7
12.0
2,089,344
7,988,472
109,600,000
3,578
1.9
7.3
52.5
13.7
1,495,644
1,495,644
20,600,000
1,976
7.3
7.3
13.8
13.8
7,102,368
7,102,368
94,200,000
3,165
7.5
7.5
13.3
13.3
342,519
371,973
4,160,000
708
8.2
8.9
12.1
11.2
DO DEUTSCHE OFFICE AG
2014 ANNUAL REPORT
25
26
PORTFOLIO
CBRE VALUATION REPORT – DO DEUTSCHE OFFICE AG PORTFOLIO – 31 DECEMBER 2014 CITY
ADDRESS
LETTABLE AREA
WALT
TOTAL (SQ.M.)
VACANCY RATE (PERCENT)
(IN YEARS)
Hamburg
Borsteler Chaussee 111 – 113/ Brödermannsweg 1, 5 – 9
6,785
3.1
2.1
Hamburg
Heidenkampsweg 51 – 57
9,834
0.6
1.5
Heilbronn
Bahnhofstrasse 1 – 5
14,750
0.0
5.2
Ismaning
Gutenbergstrasse 1
12,219
69.4
1.9
Ismaning
Oskar-Messter-Strasse 22 – 24
12,417
17.7
5.6
Kaiserslautern
Stiftsplatz 5
9,279
33.5
3.6 5.6
Cologne
An den Dominikanern 6
27,462
0.0
Cologne
Maarweg 165
22,803
23.8
3.4
Ludwigsburg
Carl-Benz-Strasse 15/Junkersstrasse
32,538
5.3
7.0
Meerbusch
Earl-Bakken-Platz 1
8,038
0.0
4.7
Munich
Taunusstrasse 34 – 36
11,196
0.0
5.2
Neuss
Carl-Schurz-Strasse 2
12,650
2.1
2.4
Nuremberg
Lina-Ammon-Strasse 19, 19a, 19b
11,495
24.8
4.0
Nuremberg
Richard-Wagner-Platz 1
6,445
38.6
4.7
Ratingen
Berliner Strasse 91
33,900
21.3
9.3
Ratingen
Pempelfurtstrasse 1
19,147
45.4
4.3
Recklinghausen
Josef-Wulff-Strasse 75
19,855
0.0
6.2
Stuttgart
Ingersheimer Strasse 20
12,326
4.6
2.4
Stuttgart
Kupferstrasse 36
5,407
16.4
2.7
Stuttgart-Möhringen
Breitwiesenstrasse 5 – 7
25,256
0.0
4.8
Trier
Frauenstrasse 5 – 9/ In der Olk 10 – 16
17,103
5.9
4.7
Weiterstadt
Feldstrasse 16/ Gutenbergstrasse
DO DEUTSCHE OFFICE AG
2014 ANNUAL REPORT
14,178
30.3
4.1
898,672
16.4
4.7
PORTFOLIO
(ANNUAL) GROSS RENTAL INCOME ACTUAL (EUR/P. A.)
POTENTIAL (EUR/P. A.)
MARKET VALUE TOTAL (EUR)
EUR/SQ.M. (EUR)
GROSS INITIAL YIELD ACTUAL (PERCENT)
POTENTIAL (PERCENT)
GROSS RENT MULTIPLIER ACTUAL
POTENTIAL
746,016
773,256
11,000,000
1,621
6.8
7.0
14.7
14.2
1,584,516
1,602,348
23,800,000
2,420
6.7
6.7
15.0
14.9
2,152,932
2,152,932
31,400,000
2,129
6.9
6.9
14.6
14.6
340,956
1,194,468
10,900,000
892
3.1
11.0
32.0
9.1
1,235,088
1,505,400
17,000,000
1,369
7.3
8.9
13.8
11.3
810,372
1,077,576
12,200,000
1,315
6.6
8.8
15.1
11.3
3,696,000
3,696,000
58,100,000
2,116
6.4
6.4
15.7
15.7
2,470,092
3,411,948
45,500,000
1,995
5.4
7.5
18.4
13.3
1,642,560
1,682,532
19,300,000
593
8.5
8.7
11.7
11.5
1,380,840
1,380,840
16,400,000
2,040
8.4
8.4
11.9
11.9
1,744,008
1,744,008
26,300,000
2,617
6.6
6.6
15.1
15.1
1,286,004
1,311,444
13,800,000
1,091
9.3
9.5
10.7
10.7
1,193,172
1,507,944
16,100,000
1,401
7.4
9.4
13.5
10.7
104,460
856,296
12,400,000
1,924
0.8
6.9
118.7
14.5
3,444,840
4,260,732
50,200,000
1,481
6.9
8.5
14.6
11.8
1,309,860
2,331,432
25,500,000
1,332
5.1
9.1
19.5
10.9
2,100,000
2,100,000
31,500,000
1,587
6.7
6.7
15.0
15.0
1,668,180
1,748,484
23,800,000
1,931
7.0
7.4
14.3
13.6
469,404
540,456
6,300,000
1,165
7.5
8.6
13.4
11.7
3,036,264
3,036,264
44,500,000
1,762
6.8
6.8
14.7
14.7
2,037,744
2,126,052
28,500,000
1,666
7.2
7.5
14.0
13.4
517,536
717,492
7,500,000
529
7.0
9.7
14.5
10.5
109,405,503
130,631,529
1,780,660,000
1,981
6.1
7.3
16.3
13.6
DO DEUTSCHE OFFICE AG
2014 ANNUAL REPORT
27
28
SHARE
SHARE
DEVELOPMENT OF THE DEUTSCHE OFFICE SHARE
At the end of the second half of 2014, the markets continued to perform inconsistently; stabilising and adverse effects temporar-
The merger of Prime Office REIT-AG with OCM German Real Estate
ily cancelled each other out. Positive effects included the robust
Holding AG became effective on 21 January 2014. Trading of the
US economy, falling prices of commodities (in particular oil) and
share commenced on 22 January 2014, and since 7 July 2014, the
low interest rates in the major industrialised nations. Negative
company has traded under the name of DO Deutsche Office AG.
effects included, in particular, fears of major technical stock market corrections, the weakness of the economies in Europe, Japan and China, as well as geopolitical risks.
DEVELOPMENT IN TURBULENT MARKETS POSITIVE OVERALL IN 2014
However, in the middle of Q4, these adverse factors were outweighed by investor hopes that measures introduced by the
The capital market environment was predominantly positive in
European Central Bank would further stimulate the markets.
the first half of 2014. This environment was supported by a prime
On 15 October 2014, the ECB adopted a decision on the imple-
rate which continued at a low level and by the ongoing pursuit of a
mentation of a third covered bond purchase programme, which
broadly expansive monetary policy by major central banks, which
boosted the markets at the end of the year. The overall picture
obviously kept up the pressure on investors to invest.
can therefore be described as unsettled with some periods of weakness, but with a positive development overall.
On the other hand, the events in Ukraine and the resulting tensions with Russia had an adverse impact. The stock markets were adversely affected by turmoil in some emerging nations and an initially weaker US economy due to seasonal effects. In the sec-
DEUTSCHE OFFICE SHARE WITH VOLATILE PERFORMANCE IN 2014
ond half of 2014, the capital market environment was increasingly overshadowed by geopolitical crises and concerns about the
The share price of Deutsche Office showed a high degree of vola-
performance of the economy. These concerns had been prompted
tility in fiscal year 2014. The performance of the share price was
by the conflict in Ukraine and unrest in Iraq and Syria in connec-
slightly negative in the course of the year. However, since the
tion with activities by the radical Islamist terrorist organisation
beginning of 2015, the share price has recovered significantly,
Islamic State (IS). The developments in the Near and Middle East
growing by over 30% to approx. EUR 4.00, accompanied by very
were seen to pose a potential risk to the development of oil prices
high trading volumes.
and hence to the global economy. Uncertainty about the referendum on Scottish independence also had a negative impact
Starting from EUR 3.26 – the XETRA opening price on 22 Jan-
on stock markets.
uary 2014, when trading in the share commenced, the share price initially came under downward pressure. In this context,
SHARE PRICE PERFORMANCE VS. SDAX AND EPRA EUROPE INDEXES (AS OF 22 JANUARY 2014)
the cash capital increase announced by Deutsche Office, which
INDEXED TO 100
depressed the share price. In the course of this capital increase,
DEUTSCHE OFFICE
SDAX
was implemented in the first half of February 2014, initially which was successfully implemented, a total of 46.6 million
EPRA EUROPE
140
new shares were issued, yielding gross proceeds of approx.
130
EUR 130.4 million. In the course of Q1, the share price recov-
120
ered as expected and settled at a relatively constant level.
110 100 90 80 70 Feb. ‘14
Apr.
DO DEUTSCHE OFFICE AG
June
Aug.
2014 ANNUAL REPORT
Oct.
Dec.
March ‘15
SHARE
At the beginning of Q2, the share price performance was very positive. The announcement of the quarterly earnings of
ENCOURAGING START TO THE YEAR LEADS TO MUCH BETTER VALUATION
Deutsche Office on 13 May 2014 led to a further increase in the share price so that the share reaches is annual high of EUR 3.49
In contrast, the year 2015 began with a significant recovery of
on 29 May 2014. After minor profit taking at the end of Q2,
the Deutsche Office share price, which increased by approx. 40%
the share price stabilised at approx. EUR 3.30. The strong let-
by the end of March 2015, accompanied by very high trading vol-
ting performance, the continued improvement of the financing
umes. While the performance of Germany’s listed office sector
structure and the financing costs, as well as the integration at
was positive overall at the beginning of the year, the Deutsche
the site in Cologne, which was completed faster than expected,
Office share clearly surpassed the sector’s performance. The
provided positive stimuli. However, volatility increased once
outperformance of the Deutsche Office share compared with
again, in particular towards the end of Q3, so that the share
the sector as a whole was also due to the sale of the “Westend
price came under pressure along with the overall market at the
Ensemble” property, which was published on 29 January 2015
end of Q3. As a result, the Deutsche Office share could not stay
within the framework of a bidding process.
above the EUR 3 mark at the end of September. In the management’s view, the share price did not yet reflect The share price reached its all-year low of EUR 2.61 on 15 Octo-
the actual value, the operational performance and the letting
ber 2014. In the course of Q4, the share price recovered with the
volume of Deutsche Office in fiscal year 2014. This was demon-
brightening of the capital market environment and reached its
strated by the high discount on the company’s Net Asset Value
quarterly high of EUR 3.00 on 23 December 2014.
(NAV), which affected the share price performance throughout fiscal 2014. Although the share has made up for a large part
Starting from the quarterly low to the end of the period under
of the NAV discount since the beginning of 2015, there is still a
review, the share price increased by approx. 12.3%, but failed to
gap compared with the companies of the peer group, which is
return to the annual high. The XETRA closing price of fiscal 2014
not justified in the opinion of the Executive Board of Deutsche
amounted to EUR 2.93 on 30 December 2014. Overall, the share
Office in view of the FFO performance above guidance and the
price performance in the course of the year was negative, with
reduction of the loan-to-value ratio (LTV) to 53.5%. In fiscal 2015,
a decline of approx. 10.2%.
the Executive Board will therefore continue to concentrate on achieving a fair valuation of Deutsche Office in the capital market and on making up for the valuation difference which is
ENCOURAGING START TO THE YEAR 2015
still manifest now and then. INDEXED TO 100 DEUTSCHE OFFICE
SDAX
EPRA EUROPE
140 130 120 110 100 90 02 Jan.
01 Feb.
01 March
24 March
DO DEUTSCHE OFFICE AG
2014 ANNUAL REPORT
29
30
SHARE
THE SHARE OF DO DEUTSCHE OFFICE AG AT A GLANCE
PROPERTY INVESTORS SHOW GREAT INTEREST IN THE BUSINESS MODEL OF DEUTSCHE OFFICE
XETRA opening price on 22 January 2014
EUR 3.26
XETRA closing price on 30 December 2014
EUR 2.93
Low/high price in period under review
EUR 2.61/EUR 4.09
Market capitalisation on 30 December 2014
EUR 528.9 million
XETRA closing price on 24 March 2015
EUR 4.09
investment focus on property companies.
Market capitalisation on 24 March 2015
As of the 31 December 2014 reporting date, the shareholder structure of Deutsche Office was as follows: Oaktree Capital Group Holdings GB, LLC holds 60.4% and Ironsides Partners LLC holds 4.5% of the shares of Deutsche Office. In addition, the Company’s shareholder base is characterised by a high share of international and specialised institutional investors with a primary
EUR 738.2 million
Free float amounted to approx. 40% of the shares of DO
Market segment
Regulated Market/Prime Standard, Frankfurt and XETRA
Deutsche Office AG as of 31 December 2014.
Index
FTSE EPRA/NAREIT Global Real Estate Index Series FTSE EPRA/NAREIT Europe Index Series SDAX Index
Number of shares
180,529,633
Securities identification number (WKN)
PRME02
ISIN
DE000PRME020
OUR INVESTOR RELATIONS WORK – WE SHOW INTERNATIONAL PRESENCE In the past fiscal year, the investor relations activities of Deutsche Office were focused as usual on a continual and transparent exchange with its stakeholders. In the first half of 2014, investor relations were mainly focused on intensive road show
As of 31 December 2014, the shareholder structure of Deutsche
activities in connection with the capital increase and the com-
Office was as follows:
pany’s Annual General Meeting, which was held on 20 May 2014 in Cologne. At the AGM, the vast majority of the shareholders (99.9%) approved the change of the company’s name
THE SHAREHOLDER STRUCTURE OF DEUTSCHE OFFICE
to DO Deutsche Office AG. AS OF 31 DECEMBER 2014
35.1 % Free Float
60.4 % Oaktree Capital Group Holdings GP, LLC
4.5 % Ironsides Partners LLC
DO DEUTSCHE OFFICE AG
2014 ANNUAL REPORT
SHARE
In the second half of 2014 and at the beginning of 2015, external
ATTRACTIVE DIVIDEND PROPOSAL OF EUR 0.15 PER SHARE
investor relations activities were intensified by the company’s participation in a total of eight investors’ conferences, including
At the Annual General Meeting on 17 June 2015, the Executive
the major conferences organised by Goldman Sachs/Berenberg
Board and the Supervisory Board of Deutsche Office will propose
and Baader in Munich, by Société Général and Commerzbank
to the shareholders that a dividend of EUR 0.15 per outstanding
in London, and by Kepler Cheuvreux/UniCredit in Frankfurt. In
share be paid out for fiscal year 2014. The proposed dividend is
addition, the Executive Board held approx. 150 meetings with
therefore significantly above the payout of between EUR 0.10
investors and analysts during roadshows in Germany, Europe
and EUR 0.11 that was originally announced.
and North America. Furthermore, various field trips were organised with investors and analysts.
Furthermore, the Executive Board and the Supervisory Board of Deutsche Office in future intend to increase the dividend payout,
Overall, reporting by analysts was intensified once again in fiscal
which had previously been within a range of approx. 40 to 45%
year 2014. In February 2015, a total of nine analysts were monitor-
of Funds from Operations (FFO), to a range of 50 to 55% of FFO.
ing the Deutsche Office share: BROKER
ANALYST
RECOMMENDATION
PRICE TARGET
DATE
6 March 2015
Kepler Cheuvreux
Dr Dirk Becker
Buy
4.80
Deutsche Bank
Markus Scheufler
Buy
4.50
19 Feb. 2015
Bankhaus Lampe
Dr Georg Kanders
Buy
4.30
12 Feb. 2015
BAADER Helvea
Andre Remke
Buy
4.25
3 Feb. 2015
SRC Research
Stefan Scharff
Overweight
4.25
2 Feb. 2015 10 Feb. 2015
Kempen & Co
Boudewijn Schoon
Buy
4.20
Berenberg
Kai Klose
Buy
4.10
30 Jan. 2015
ODDO Seydler
M. Martin, F. Parmantier
Buy
4.00
30 Jan. 2015
VICTORIAPARTNERS
Bernd Janssen
n. a.
3.70 – 4.40
18 Jan. 2015
The outlook for the share of Deutsche Office is positive, with price targets of between EUR 4.00 and EUR 4.80 and a fair value range of between EUR 3.70 and EUR 4.40. With one recommendation to overweight the share, seven banks and analysts issued a buy recommendation.
DO DEUTSCHE OFFICE AG
2014 ANNUAL REPORT
31
32
2014 BUSINESS PERFORMANCE, INCLUDING EPRA FIGURES INFORMATION ON PRO FORMA REPORTING RESULTS FROM OPERATIONS
2014 BUSINESS PERFORMANCE, INCLUDING EPRA FIGURES
INFORMATION ON PRO FORMA REPORTING
the Company’s net assets, financial position and results from operations are provided on a pro forma basis. Since the two com-
The merger and hence the combination of Prime Office REIT-AG
panies previously had no business relationship, the pro forma
(PO REIT) with OCM German Real Estate Holding AG (OCM Group)
figures are based on the sum of the financial statements sep-
to establish DO Deutsche Office AG (formerly: Prime Office AG)
arately prepared as of 31 December 2013, without taking into
became effective with the entry in the Commercial Register
account effects of the first-time consolidation, which was not
on 21 January 2014. For this reason, the Consolidated Financial
implemented until 21 January 2014. For the 2014 figures, the
Statements for the period ended 31 December 2014 reflect the
earnings contributions of PO REIT in January 2014 were not added
business combination for a period of eleven months only. The
to the 2014 results from operations; instead, they are only shown
figures specified in the Consolidated Financial Statements for
in specific selected cases.
the period ended on 31 December 2013 do not reflect the business combination; instead, they represent only the figures for
DO Deutsche Office AG is a member of EPRA (European Public
the OCM Group.
Real Estate Association). To present its business performance in a transparent and comparable manner, Deutsche Office reports
To permit an economically sensible discussion of the Company’s
important performance indicators in accordance with the stand-
performance in fiscal 2014, the 2013 figures presented below on
ards recommended by EPRA.
RESULTS FROM OPERATIONS IN EUR K (UNLESS OTHERWISE STATED)
2014
PRO FORMA 2013
CHANGE
105,528
135,061
– 22%
23,045
25,704
– 10%
– 34,417
– 40,303
– 15%
94,156
120,462
– 22%
Administrative expenses
– 10,352
– 11,782
– 12%
Other income
117,526
7,317
> + 100%
Other expenses
– 25,158
– 15,794
59%
Rental income from investment properties Service charge income Property operating expenses Net rental income
Intermediate result
176,172
100,204
76%
Investment property disposal proceeds
125,285
215,575
– 42%
Investment property disposal expenses
– 124,181
– 219,902
– 44%
1,104
– 4,327
n. a.
– 5,612
– 115,699
– 95%
Profit/loss from disposal of investment properties Gain/loss on measurement at fair value Profit/loss before finance costs
171,664
– 19,822
n. a.
Financial result
– 43,999
– 106,766
– 59%
Profit/loss before taxes
127,665
– 126,588
n. a.
– 2,746
1,313
n. a.
124,919
– 125,275
n. a.
0.73
– 0.94
n. a.
Income taxes Net income Earnings per share: Undiluted and diluted earnings per share1 (in EUR) 1
Based on an average number of 172,067,410 shares in 2014 (2013: pro forma 133,941,345 shares after merger)
DO DEUTSCHE OFFICE AG
2014 ANNUAL REPORT
2014 BUSINESS PERFORMANCE, INCLUDING EPRA FIGURES RESULTS FROM OPERATIONS
Although pro forma figures have been provided for 2013, the two fiscal years are not directly comparable. The Consolidated Financial Statements for 2014 are characterised by income of EUR 115,388 k from the business combination due to the merger of Prime Office REIT-AG with the Company on 21 January 2014 as well as expenses of EUR 24,157 k in connection with the merger, in particular as a result of provisions accrued for the property transfer tax due on the fictitious acquisition of the Prime Office REIT-AG properties. Since the first-time consolidation did not take effect until 21 January 2014, nearly all the earnings contributions of Prime Office REIT-
EPRA-LIKE-FOR-LIKE RENTAL DEVELOPMENT IN EUR K
2014
2013
CHANGE
105,528
89,346
n. a.
Rental income from investment properties As reported in the Consolidated Financial Statements Pro forma adjustments PO REIT Pro forma Rental income “Like-for-Like” adjustments EPRA Rental income “Like-for-Like”
2,827
45,715
n. a.
108,355
135,061
– 20%
– 1,285
– 20,795
n. a.
107,070
114,266
– 6%
AG for January 2014 are disregarded, amounting to EUR 2,827 k in rental income from investment properties and EUR 2,382 k in net rental income. The 12-month pro forma rental income from invest-
Unlike the two “Hainstrasse” properties in Leipzig and the “Alte-
ment properties therfore amounts to EUR 108,355 k, and the pro
nessener Strasse” property in Essen, the selling prices for the
forma net rental income totals EUR 96,538.
other three properties sold in 2014 had already been recognised as of 31 December 2013 and as of the first-time consolidation
Due to the sale of three properties in 2013 and six properties
date, respectively, so that the property disposal proceeds were
in 2014, the investment portfolio comprises only 51 properties
offset by corresponding expenses. The sale of the properties in
as of 31 December 2014, compared with the pro forma port-
Leipzig and Essen led to a gain on disposal of EUR 2,445 k. In
folio in 2013, which alone leads to a decline in rental income
addition, follow-up costs for property sales in the previous year
of EUR 20,795 k. Furthermore, the “Am Seestern 1” property
amounted to EUR 1,341 k.
in Düsseldorf was still fully let in Q1/2013, and the “Platz der Einheit 1” property in Frankfurt (KASTOR) was nearly fully occupied in 2013. The main tenants of the two properties moved out at the end of Q1/2013 and in Q4/2013, respectively, so that the rental income for both properties decreased by a total of EUR 7,248 k in the 2014 reporting period.
DO DEUTSCHE OFFICE AG
2014 ANNUAL REPORT
33
34
2014 BUSINESS PERFORMANCE, INCLUDING EPRA FIGURES EPRA EARNINGS
EPRA EARNINGS EPRA earnings show the operating earnings generated by property companies, where the net profit for the period is adjusted for valuation effects, special items and property sales. IN EUR K (UNLESS OTHERWISE STATED)
Result for the period (a) Changes in value of investment properties
2014
PRO FORMA 2013
124,919
– 125,275
n. a.
5,612
115,699
– 95%
CHANGE
– 1,104
4,327
> – 100%
– 91,231
11,220
> – 100%
5,796
32,875
– 82%
(e) Deferred tax related to EPRA adjustments
– 5,453
– 25,972
– 79%
EPRA earnings
38,539
12,874
> + 100%
0.22
0.10
> + 100%
(b) Gains/Losses on the disposal of investment properties (c) Special items related to the merger (d) Special items from the redemption of financial instruments
EPRA earnings per share1 (in EUR)
Group-specific adjustments: Interest expense for interest-bearing loans from related entities Earnings after Group-specific adjustments Earnings after Group-specific adjustments per share1 (in EUR) 1
0
4,160
– 100%
38,539
17,034
> + 100%
0.22
0.13
76%
Calculated on the basis of average number of 172,067,410 shares in 2014 (2013: pro forma 133,941,345 shares after merger)
After adding or subtracting special items, EPRA earnings after
Special items in connection with the merger include income
Group-specific adjustments increased by EUR 21,505 k, compared
from the first-time consolidation (EUR 115 million) less transac-
with 2013. Lost earnings contributions due to the divestment of
tion costs (in particular property transfer tax) (EUR 24 million).
properties as well as vacancy in the “Am Seestern” and “KASTOR”
Deferred tax related to EPRA adjustments is not the tax recog-
properties were more than offset by an improved financial result.
nised in the Group and is provided for information only.
Disposal proceeds and proceeds from the cash capital increase were, to a large extent, used to repay loans, so that – in conjunction with the refinancing of the Homer and Herkules portfolios and the associated improvement of terms – the financial result improved significantly in 2014.
DO DEUTSCHE OFFICE AG
2014 ANNUAL REPORT
2014 BUSINESS PERFORMANCE, INCLUDING EPRA FIGURES FUNDS FROM OPERATIONS (FFO) EPRA EXPENSE RATIO
FUNDS FROM OPERATIONS (FFO) IN EUR K (UNLESS OTHERWISE STATED)
2014
EPRA EXPENSE RATIO PRO FORMA 2013
CHANGE
The purpose of the EPRA expense ratio is to make operating and administrative expenses of listed properties comparable by relat-
Rental income Administrative expenses1 Other net income/expenses
1
Financial result
1
Funds from operations (FFO) FFO per share2 (in EUR)
94,156
120,462
– 22%
– 9,370
– 11,782
– 20%
65
2,977
– 98%
– 38,203
– 69,731
– 45%
46,648
41,927
11%
0.27
0.31
– 13%
ing them to rental income. Relevant operating expenses include, for instance, contractual and non-recoverable property-related costs due to vacancies. IN EUR K (UNLESS OTHERWISE STATED)
2014
PRO FORMA 2013
CHANGE
Adjusted for one-off and special items Average number of shares issued in 2014: 172,067,410 (2013 pro forma: 133,941,345 shares after merger)
Non-recoverable property operating expenses
– 11,372
– 14,598
– 22%
Administrative expenses1
– 9,370
– 11,782
– 20%
In 2014, funds from operations (FFO) amounted to EUR 46,648 k,
EPRA costs (including vacancy costs)
– 20,742
– 26,380
– 21%
6,519
6,324
3%
EPRA costs (excluding vacancy costs)
– 14,223
– 20,056
– 29%
Rental income
105,528
135,061
– 22%
EPRA cost ratio (as a percentage) (including vacancy costs)
19.66
19.53
loans and swaps early (EUR 6 million; 2013: EUR 3 million). In the
EPRA cost ratio (as a percentage) (excluding vacancy costs)
13.48
14.85
previous year, FFO were adjusted for non-cash interest expenses
of which: Property operating expenses (as a percentage)
4.60
6.13
Administrative expenses (as a percentage)
8.88
8.72
1 2
which was EUR 4,721 k or 11% above the pro forma FFO for 2013. The reduction of net operating income due to property sales and vacancies was more than offset by the improved financial result. FFO were adjusted for non-sustained effects such as income from first-time consolidation (EUR 115 million), transaction costs (in particular property transfer tax) in connection with the merger (EUR 24 million; 2013: EUR 7 million) and costs of terminating
Vacancy costs
for a loan which was contributed to equity at the end of 2013 (EUR 4 million).
1
Adjusted for one-off and special items
Due to the higher average vacancies in 2014, compared with 2013, vacancy costs increased slightly. Consequently, the EPRA expense ratio (including vacancy costs) also increased slightly although property-related operating expenses and administrative expenses decreased in proportion to rental income. To some extent, the utilisation of synergies from the merger of PO REIT with the Company was already reflected by the reduction in administrative expenses, which will continue in 2015. With an expense ratio of below 20% and an administrative expense ratio of below 9%, with the objective of reducing it to below 8%, Deutsche Office demonstrates its cost leadership.
DO DEUTSCHE OFFICE AG
2014 ANNUAL REPORT
35
36
2014 BUSINESS PERFORMANCE, INCLUDING EPRA FIGURES EPRA NET INITIAL YIELD NET ASSET VALUE AND EPRA NET ASSET VALUE
EPRA NET INITIAL YIELD The EPRA net initial yield (EPRA NIY) is calculated as the annualised rental income less non-recoverable property operating expenses, divided by the market value of the property portfolio including acquisition costs. The EPRA topped-up net initial yield is calculated by making an adjustment to EPRA NIY in respect of lease incentives such as rent-free periods. IN EUR K (UNLESS OTHERWISE STATED)
Investment properties Estimated transaction costs Total real estate portfolio (gross)
Annualised rental income
2014
PRO FORMA 2013
CHANGE
1,780,660
1,904,110
– 6%
121,028
120,526
0
1,901,688
2,024,636
– 6%
2%
106,798
104,397
Non-recoverable service charge expenses1
– 8,614
– 9,247
7%
Annualised net rental income
98,184
95,150
3%
1,454
4,214
– 65%
99,638
99,364
0%
EPRA net yield as a percentage
5.16%
4.70%
EPRA topped-up net yield as a percentage
5.24%
4.91%
2014
PRO FORMA 2013
1,780,660
1,904,110
– 6%
92,800
104,441
– 11%
Rent for expiring rent-free periods Topped-up annualised net rental income
1
Based on percentage assumptions of IAS 40 valuation
NET ASSET VALUE AND EPRA NET ASSET VALUE IN EUR K (UNLESS OTHERWISE STATED)
Investment properties Assets held for sale
CHANGE
– 1,050,452
– 1,318,494
– 20%
Cash and cash equivalents
63,503
80,223
– 21%
Other assets and liabilities
– 83,487
– 62,967
33%
Net asset value (NAV)
803,024
707,313
14%
4.45
5.28
– 16%
0
0
n.a.
803,024
707,313
14%
Interest-bearing loans
Net asset value (NAV) per share1 (in EUR) Effects from the exercise of options, profit participation rights and other equity rights Diluted NAV after exercise of options, profit participation rights and other equity rights Fair value of derivative financial instruments Diluted EPRA NAV Diluted EPRA NAV per share1 (in EUR)
51,879
44,083
18%
854,903
751,396
14%
4.74
5.61
– 16%
Fair value of derivative financial instruments
– 51,879
– 44,083
18%
Diluted EPRA NNNAV
803,024
707,313
14%
4.45
5.28
– 16%
Diluted EPRA NNNAV per share1 (in EUR) 1
Calculated on the basis of 180,529,633 shares issued as of 31 December 2014 (2013: pro forma 133,941,345 shares after merger)
DO DEUTSCHE OFFICE AG
2014 ANNUAL REPORT
2014 BUSINESS PERFORMANCE, INCLUDING EPRA FIGURES NET ASSET VALUE UND EPRA NET ASSET VALUE LOAN TO VALUE RATIO CASH FLOW
On the one hand, net asset value (NAV) increased by EUR 128 mil-
The repayment of loans from the proceeds of the property dis-
lion due to the cash capital increase in February 2014. On the
posals, as well as scheduled loan repayments and the successful
other hand, NAV decreased as a result of the reduction in the
refinancing of the Homer and Herkules acquisition loans using
property portfolio’s value as well as the valuation of derivatives
nearly all of the proceeds from the cash capital increase led to an
in connection with the first-time consolidation and the subse-
improvement in the loan-to-value ratio (LTV) as of 31 December
quent valuation as of 31 December 2014.
2014 by 8.1 percentage points, compared with 31 December 2013.
The EPRA NAV per share was diluted due to the cash capital increase at a share price of EUR 2.80 and amounted to EUR 4.45
CASH FLOW
as of the balance-sheet date on 31 December 2014. The cash flow from operating activities of EUR 70 million was The change in investment properties results from, on the one
mainly used for investments (EUR 20 million) and current inter-
hand, the disposal of two properties in Leipzig and one property
est payments (EUR 41 million). In 2014, the cash flow from oper-
in Essen as well as the reclassification of three properties held for
ating activities was adversely affected by cash outflows in con-
sale as of the balance sheet date. Furthermore, the acquired assets
nection with the transaction costs for the merger. Disposal
and liabilities were revalued in connection with the first-time con-
proceeds (EUR 125 million), proceeds from the business com-
solidation of PO REIT. As a result of this revaluation, the value of the
bination (EUR 45 million) and net inflows from the cash capi-
“Ludwig-Erhard-Anlage” property in Frankfurt (“Westend Ensem-
tal increase (EUR 127 million) were used almost entirely to repay
ble”) was reduced by EUR 25.9 million, and the value was reduced
loans and to redeem financial instruments. Following payments
again by EUR 12.5 million due to the signed sales contract.
of EUR 8.0 million, cash funds include an amount of EUR 14.7 million as of 31 December 2014 earmarked for the property transfer tax payable as a result of the merger with PO REIT.
LOAN TO VALUE RATIO (LTV) IN EUR K (UNLESS OTHERWISE STATED)
Balance sheet total Equity Interest-bearing loans (bank loans)
2014
PRO FORMA 2013
1,951,295
2,119,774
803,024
707,313
1,050,452
1,318,494
97,819
93,967
Leverage
58.8%
66.6%
Equity ratio
41.2%
33.4%
1,780,660
1,904,110
Other liabilities
Investment properties Assets held for sale Bank loans1 Cash and cash equivalents2 Net liabilities to banks Net Loan to value 1 2
92,800
104,441
1,050,452
1,318,494
48,836
80,237
1,001,616
1,238,257
53.5%
61.6%
including loans of properties sold in 2014, less funds earmarked for property transfer tax payment (2013 including cash and cash equivalents of properties sold)
DO DEUTSCHE OFFICE AG
2014 ANNUAL REPORT
37
38
COMBINED MANAGEMENT REPORT
DO DEUTSCHE OFFICE AG
2014 ANNUAL REPORT
COMBINED MANAGEMENT REPORT
COMBINED MANAGEMENT REPORT
58
4. REMUNERATION REPORT AND LEGAL DISCLOSURES
40
1. COMPANY FUNDAMENTALS
40
1.1. BUSINESS MODEL
40
1.2. OVERVIEW OF THE PORTFOLIO
41
1.3. OBJECTIVES AND STRATEGIES
41
1.4. CORPORATE SUCCESS FACTORS
58
5.1. COMPOSITION OF SHARE CAPITAL
42
1.5. CORPORATE GOVERNANCE AND VALUE-BASED MANAGEMENT
59
5.2. SIGNIFICANT SHAREHOLDINGS
43
1.6. CORPORATE STRUCTURE
59
5.3. PROVISIONS ON THE APPOINTMENT AND DISMISSAL OF
44
2. ECONOMIC REVIEW
44
2.1. GENERAL STATEMENT ON THE BUSINESS PERFORMANCE AND ON
44
2.2. MACROECONOMIC AND SECTOR-SPECIFIC ENVIRONMENT
46
2.3. BUSINESS PERFORMANCE OF DEUTSCHE OFFICE GROUP
47
2.4. NET ASSETS, FINANCIAL POSITION AND RESULTS FROM
51
2.5. NET ASSETS, FINANCIAL POSITION AND RESULTS FROM
58
5. DISCLOSURES REGARDING TAKEOVERS PURSUANT TO SECTIONS 289(4) AND 315(4) GERMAN COMMERCIAL CODE (HGB)
EXECUTIVE BOARD MEMBERS AND AMENDMENTS TO THE ARTICLES OF ASSOCIATION 59
5.4. EXECUTIVE BOARD’S POWERS, IN PARTICULAR THE POWER TO
65
5.5. AGREEMENTS PROVIDING FOR THE EVENT OF A CHANGE IN
65
5.6. COMPENSATION AGREEMENTS WITH THE EXECUTIVE BOARD AND
66
5.7. OTHER DISCLOSURES
STATEMENTS) UNDER THE GERMAN COMMERCIAL CODE (HGB)
66
6. RELATED PARTY DISCLOSURES
53
3. REPORT ON RISKS AND OPPORTUNITIES
66
7. STATEMENT OF EVENTS AFTER THE REPORTING DATE
53
3.1. RISK MANAGEMENT
54
3.2. RISK REPORT
66
8. OUTLOOK
58
3.3. OPPORTUNITIES FOR THE COMPANY’S FUTURE DEVELOPMENT
ISSUE OR BUY BACK SHARES
THE BUSINESS SITUATION OF DEUTSCHE OFFICE GROUP
CORPORATE CONTROL
EMPLOYEES IN THE EVENT OF A TAKEOVER BID
OPERATIONS OF DEUTSCHE OFFICE GROUP (IFRS)
OPERATIONS OF DEUTSCHE OFFICE AG (YEAR-END FINANCIAL
DO DEUTSCHE OFFICE AG
2014 ANNUAL REPORT
39
40
COMBINED MANAGEMENT REPORT 1. COMPANY FUNDAMENTALS
COMBINED MANAGEMENT REPORT
1. COMPANY FUNDAMENTALS
ACTIVE ASSET MANAGEMENT The core of active asset management is to reduce the vacancy
DO Deutsche Office AG (formerly: Prime Office AG), Cologne,
rates of our properties and to ensure that the properties are
(hereinafter referred to as “Deutsche Office” or the “Company”)
fully let on an ongoing basis through new and follow-on leases.
is a leading office property company with a focus on German
Due to the highly competitive environment in the letting mar-
metropolitan regions and conurbations. The Deutsche Office
kets, the properties and the letting performance of the Deutsche
Group has been operating in the German market for office
Office Group have to stand out from offers made for properties
properties since 2006. At the time this report was prepared,
of comparable quality and at comparable locations. Against this
the geographically diversified office property portfolio of the
background, we optimise the rental services available in order
Deutsche Office Group comprised 51 investment properties with
to meet the market’s needs, and we maintain permanent and
a total lettable area of nearly 900,000 sq.m as well as three
intensive contact with our tenants and prospective tenants to
properties held for sale and had an attractive, widely diverse
meet their specific expectations quickly and efficiently.
tenant base. According to the CBRE market valuation report of 31 December 2014, the market value of the investment properties
PROPERTY PURCHASES
amounted to EUR 1.8 billion, with annual net rental income total-
Deutsche Office sreens the market on an ongoing basis to iden-
ling EUR 109 million. The majority are multi-tenant properties.
tify attractive opportunities to invest in new properties with a
Deutsche Office’s business model is focused on yield-driven asset
potential for value growth. When acquiring properties, we give
management, in particular for office properties located in Ger-
priority to conurbations and locations in which the Company has
man metropolitan regions and conurbations. Part of Deutsche
the best possible opportunities to add value by letting and opti-
Office’s strategy is to acquire properties with the potential for
mising the properties. The expansion of the portfolio is based
value growth and making value-adding investments in the prop-
on a solid financing structure within the framework of the tar-
erties of its portfolio. In addition, Deutsche Office takes advan-
get corridor for the debt-to-equity ratio.
tage of sales opportunities over the property cycle to generate attractive proceeds from sales.
PROPERTY SALES To free up capital for purchasing additional properties, we take
Deutsche Office was listed on the stock exchange on 20 January
advantage of opportunities to sell properties within the frame-
2014. On 21 January 2014, Prime Office REIT-AG (hereinafter
work of our active portfolio management approach to achieve
referred to as “PO REIT”), Munich, as the transferring entity, was
attractive proceeds from sales within the property cycle. This
merged with the acquiring entity. On 20 May 2014, the Annual
applies primarily to properties made available to the investment
General Meeting resolved to change the Company’s name to
market after implementing measures designed to generate max-
“DO Deutsche Office AG”. The new name was entered in the reg-
imum value, so as to add value by rotating properties.
ister of companies of the Cologne District Court on 7 July 2014. 1.2. OVERVIEW OF THE PORTFOLIO 1.1. BUSINESS MODEL
In addition to the 49 properties held by Deutsche Office as of
Deutsche Office is focused on yield-driven asset management
31 December 2013, eleven properties were acquired within the
of office properties in conurbations and metropolitan regions,
framework of the merger with PO REIT, and a total of six prop-
based on the following three pillars:
erties were sold and the associated rights and obligations were transferred in 2014. As of 31 December 2014, the Group’s portfolio included a total of 54 properties, of which three properties were classified as Assets Held for Sale. Through two wholly-owned subsidiaries, Deutsche Office owned 44 properties indirectly and ten properties directly as of 31 December 2014.
DO DEUTSCHE OFFICE AG
2014 ANNUAL REPORT
COMBINED MANAGEMENT REPORT 1. COMPANY FUNDAMENTALS
Most of the properties are used as office properties. Three prop-
In future, we want to continue to grow the portfolio; in the
erties are rented out as nursing homes, and two are primarily
medium term, we envisage a portfolio volume of approx.
used as hotels. While the properties are spread out over various
EUR 3 billion, and we plan to reduce the current vacancy rate of
regions, 53 of the total of 54 properties are located in the western
approx. 16% to approx. 10%. We expect that efficient asset man-
part of Germany, and one in Berlin. Furthermore, the majority
agement and the associated economies of scale will lead to a
of the properties (36 of 54) are located in cities with more than
significant increase in margins. We want Deutsche Office to play
100,000 inhabitants. The tenant base varies, depending on the
an active role in the consolidation of the German office property
property. The majority of the properties are used by more than
sector and to be one of the market leaders.
five tenants. 1.4. CORPORATE SUCCESS FACTORS Relative to the number of investment properties, as much as
We are convinced that we have significant competitive advan-
approx. 75% of the portfolio consists of multi-tenant properties,
tages. The Deutsche Office Group operates in the office prop-
while only about 25% is made up of single-tenant properties. The
erty market in Germany, a country with attractive prospects for
weighted average lease term or “WALT” amounted to 4.7 years
strong GDP growth and growing employment. This should lead
as of 31 December 2014.
to further vacancy reductions, in particular at leading office locations, and – due to a growing interest in Germany’s property
1.3. OBJECTIVES AND STRATEGIES
investment market – to increasing property market prices, as
In combination with the regionally diversified portfolio, the
yield expectations of buyers decrease in view of the low inter-
widely diverse tenant base with a strong credit standing and
est-rate environment (“yield compression”). The Group has
from a wide variety of sectors provides the basis for stable rental
a diversified portfolio with a current market value of approx.
income and high profitability with a reasonable risk profile.
EUR 1.8 billion, a solid financing structure with an LTV of 53.5% and a market capitalisation of approx. EUR 700 million. On this basis,
In addition, the property portfolio has a high potential for value
the Company (which is listed in the SDAX) has attractive growth
growth, which Deutsche Office as a management platform com-
prospects, in particular due to the ability to finance growth by
plements with attractive cost structures and the opportunity to
both equity and debt measures because of its access to the cap-
achieve economies of scale by internalising all the major man-
ital market.
agement functions. In our opinion, the success factors of Deutsche Office can be Our objective is to continue to reduce the loan-to-value ratio
described as follows:
(ratio of interest-bearing loans less cash and cash equivalents to the value of properties, or “LTV ratio”) from 53,5% reached as of
• We have a strong asset management team owing to the many
31 December 2014 to approx. 50%. Owing to its financing struc-
years of expertise of our employees who benefit from a broad
ture and its reduced interest burden, the Deutsche Office Group
network and have access to decision-makers.
is able to finance investments in its portfolio from its operating cash flow.
• Through asset management, we manage and control the value chain from acqusition to sales and use this to add value.
For the most part, we see our properties as a long-term investment, i.e. as portfolio properties which guarantee a continuous cash flow. The more management-intensive properties with
• We have a profitable portfolio with adequate risk diversification and high earnings power.
higher potential for value growth account for approx. 20 to 25% of the overall portfolio, while approx. 10 to 15% is made up of properties held for sale. These properties have already been sta-
• The scalable and efficient management platform leads to an attractive cost structure.
bilised and will be sold to realise profits or to streamline the portfolio.
DO DEUTSCHE OFFICE AG
2014 ANNUAL REPORT
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COMBINED MANAGEMENT REPORT 1. COMPANY FUNDAMENTALS
• By reducing vacancies, the Deutsche Office Group can continue to improve its profitability and cash flow.
In fiscal 2014, Jürgen Overath was in charge of the Company’s management; after the entry of the merger with Prime Office REIT-AG in the Commercial Register on 21 January 2014, he was
• We have an attractive financing structure with low-cost
joined by Alexander von Cramm on the Executive Board.
financing terms, which we intend to improve further by taking advantage of the very favourable current environment.
SUPERVISORY BOARD The Supervisory Board supervises and advises the Executive
• Our structure is tax-efficient.
Board in its business management in accordance with the provisions of German company law. The Supervisory Board appoints
• We have the prerequisites to enable our Company to grow through acquisitions.
the members of the Executive Board, and major business transactions of the Executive Board require the Supervisory Board’s approval. In 2014, the Supervisory Board initially consisted of
In summary, rental income growing continuously on a stable
three members. After the entry of the merger with PO REIT in
basis, combined with a cost-effective and scalable management
the Commercial Register, the Supervisory Board was expanded
platform and a further improving financing structure, provide
to six members.
the basis for growing dividends as well as further growth of the Net Asset Value of the Deutsche Office Group.
CORPORATE GOVERNANCE STATEMENT PURSUANT TO SECTION 289A GERMAN COMMERCIAL CODE AND OTHER
1.5. CORPORATE GOVERNANCE AND VALUE-BASED
INFORMATION
MANAGEMENT
The Corporate Governance Statement was published on the Company’s website at www.deutsche-office.de under “Investors/
MANAGEMENT AND CONTROL
Corporate Governance/Declaration of Compliance”. The State-
EXECUTIVE BOARD
ment is also part of the Corporate Governance chapter. This
The Executive Board of Deutsche Office manages the Company
chapter also includes additional information on corporate gov-
in accordance with the provisions of German company law,
ernance, such as the composition and operation of the Execu-
the Articles of Association and the Rules of Procedure adopted
tive Board and the Supervisory Board. Furthermore, this chapter
by the Supervisory Board. The Executive Board is responsible
also contains the report on the remuneration of the Executive
for the corporate strategy, for corporate planning and for the
Board and the Supervisory Board. The Group’s control system
implementation of an effective and adequate risk manage-
is explained in detail in the Report on Risks and Opportunities.
ment system. CORPORATE GOVERNANCE The key objective of the Deutsche Office Group’s activities is to optimise the property portfolio’s added value to generate stable and growing cash flows in the interest of the Company’s shareholders and business partners. The central Group-wide planning and management system is designed to achieve this objective and is structured accordingly. The Executive Board is responsible for the management of Deutsche Office. OPERATIONAL PERFORMANCE INDICATORS The operational performance indicators for the Executive Board and the Managing Directors of the Group’s subsidiaries include, in particular, the development of vacancy rates by property and in the overall portfolio, and the rent per square metre by
DO DEUTSCHE OFFICE AG
2014 ANNUAL REPORT
COMBINED MANAGEMENT REPORT 1. COMPANY FUNDAMENTALS
property. In addition, other parameters such as the re-letting
PERFORMANCE INDICATORS
performance and the associated costs, as well as maintenance
The rental income earned from operating activities as well as
and operating expenses, rental defaults and marketing expenses
the funds from operations (FFO) are supervised and monitored
also play a role. Deutsche Office analyses performance data on a
within the Group. Regular reporting of these performance indi-
monthly basis and compares them with budgeted figures, while
cators ensures that the Executive Board and the Managing Direc-
at the same time analysing potential new lease agreements.
tors of the Group’s subsidiaries can always assess the Group’s financial performance based on up-to-date information and can
On this basis, measures are developed to achieve the primary
prepare countermeasures in the event of a negative develop-
operational management objectives, i.e. reducing vacancy rates
ment. In addition, the Group’s loan-to-value ratio (LTV) is regu-
and exploiting potential rent increases, while controlling the
larly monitored. Apart from these financial ratios, the weighted
development of expenses and continuously improving the oper-
average lease term (WALT) and the vacancy rate are other key
ating results and the key performance indicators.
metrics which are monitored on an ongoing basis.
CORPORATE PLANNING
1.6. CORPORATE STRUCTURE
The point of departure for managing the activities of the
DO Deutsche Office AG is the lead company of the Deutsche
Deutsche Office Group is detailed corporate planning, which
Office Group. The Deutsche Office Group acquires and man-
starts from the level of individual properties and then aggre-
ages properties and property investment companies. The prin-
gates the planning data at the level of the portfolio (bottom-up
cipal focus of the Group’s business operations is Germany. As of
planning). This plan is revised once a year and adjusted to reflect
31 December 2014, two German subsidiaries and 101 sub-subsid-
the current market conditions.
iaries were part of the Deutsche Office Group. The German subsidiaries, which are wholly owned by the Company, are:
As a first step, Deutsche Office prepares a detailed business plan which primarily includes the rental income expected over time, the development of maintenance and operating expenses, mar-
• German Acorn PortfolioCo I GmbH, Cologne (hereinafter referred to as “PortfolioCo I”), and
keting expenses as well as planned investments. • German Acorn PortfolioCo II GmbH, Cologne The operational targets are defined on this basis, and suitable
(hereinafter referred to as “PortfolioCo II”)
measures are planned for each individual property, taking into consideration the operational performance indicators.
PortfolioCo I (Homer Portfolio) and PortfolioCo II (Herkules Portfolio) primarily serve as management holding companies.
After the completion of the operational corporate planning pro-
Their property investments are made via real estate compa-
cess, Deutsche Office plans the administrative expenses and the
nies, in which they directly or indirectly hold 100% of the shares.
financial result and reconciles these data with the results of the
Deutsche Office is responsible for defining the corporate strat-
planned measures reported for tax purposes within the frame-
egy, corporate planning and implementing an effective and ade-
work of an integrated financial and liquidity planning process.
quate risk management system and, hence, for managing the
Planning the finance costs is of major importance because of
Deutsche Office Group. In addition, Deutsche Office directly
their significant impact on the Company’s consolidated net
holds ten properties due to the merger with PO REIT.
income and liquidity. A detailed liquidity plan is prepared with a time horizon of 36 months and is monitored and updated on a rolling basis. The final corporate plan is submitted to the Supervisory Board for approval, usually in the fourth quarter of a given year for the following years.
DO DEUTSCHE OFFICE AG
2014 ANNUAL REPORT
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COMBINED MANAGEMENT REPORT 2. ECONOMIC REVIEW
Only after the entry of the merger in the register of compa-
In addition, many leases were renewed in 2014, and the re-letting
nies on 21 January 2014 did the Company acquire control over
performance increased by 63% (in sq.m) compared with the
PO REIT, and the business combination was therefore recog-
previous year. Based on square metres, the vacancy rate of the
nised as of this date. For the purposes of German commercial
Deutsche Office Group decreased to 16.4% (2013: 17.8%), includ-
law, the merger took effect retroactively as of 1 July 2013, so that
ing properties sold, but not yet de-recognised.
the merger was already recognised in the Financial Statements dated 31 December 2013.
Due to a significantly lower interest burden as a result of substantial loan repayments from the sale of properties,
Due to the mergers with PO REIT and German Acorn, Deutsche
FFO increased relative to the previous year by approx. 15% to
Office took on 34 employees after the entry of both mergers. As
EUR 47 million (2013: EUR 41 million), which was above the most
of 31 December 2014, the Company had 39 employees.
recently published FFO forecast of between EUR 44 million and EUR 46 million for fiscal 2014.
2. ECONOMIC REVIEW
2.2. MACROECONOMIC AND SECTOR-SPECIFIC ENVIRONMENT
The Consolidated Financial Statements for 2014 are comparable
MACROECONOMIC DEVELOPMENT
with the previous year’s Consolidated Financial Statements to
According to the International Monetary Fund (IMF), global
a limited extent only because the merger with PO REIT was not
economic growth amounted to 3.3% in 2014, while the overall
recognised until the end of January 2014, so that, in 2013, the
growth of world trade (3.1%) was somewhat slower than in the
scope of consolidation was different from that in 2014. Only after
previous year.
the entry of the merger in the register of companies had the requirements been met for consolidating PO REIT.
In the developed economies, growth totalled 1.8%, while the economies in the euro area grew at 0.8%, after a slight decline
The 2014 Financial Statements of Deutsche Office are also com-
in the previous year (2013: – 0.5%). Germany continues to be the
parable to the previous year’s Financial Statements to a limited
key engine of growth in the euro zone, with a rate of 1.6% for
extent only because the mergers with PO REIT, German Acorn
the full year 2014.
and FinCo GmbH already took effect as of 1 July 2013 for the purposes of German commercial law, and the accretion of FinCo KG
In its 2015 Annual Economic Report, the German government
became effective as of 15 November 2013. While the Company
stated that, overall, Germany’s economy and labour market were
was engaged in full business operations in 2014, it had a pure
in good shape. After a period of stagnation in Q2 and Q3/2014,
holding function for half of the year 2013 and did not begin full
the economy returned to a moderate growth path, based on a
business operations until the second half of the year.
record level of employment and the continued positive labour market development, which facilitated significant pay increases.
2.1. GENERAL STATEMENT ON THE BUSINESS PERFORMANCE
Overall, the Gross Domestic Product increased by 1.6% in 2014,
AND ON THE BUSINESS SITUATION OF DEUTSCHE OFFICE
i.e. 120 basis points over 2013. The ground for this GDP growth
GROUP
was prepared on the demand side, in particular by the increase
Fiscal year 2014 was characterised by the completion of the
in consumer spending and in investments in buildings and
merger with PO REIT and the subsequent integration. In addi-
equipment.
tion, a cash capital increase was implemented, and the refinancing of the Homer and Herkules portfolios was completed.
DO DEUTSCHE OFFICE AG
2014 ANNUAL REPORT
COMBINED MANAGEMENT REPORT 2. ECONOMIC REVIEW
THE OFFICE PROPERTY MARKET IN GERMANY
again strongest for office properties when compared with
The German market for commercial properties is subdivided into
other types of property use. In this context, there is a particu-
regional and local markets. These market segments, in turn, can
larly strong interest in multi-tenant properties. According to
be broken down into the properties’ type of use, with the mar-
the “Barometer of Trends”, Munich, Hamburg and Berlin are the
kets for office and retail properties being regarded as the prin-
preferred locations for investments in office properties. While
cipal markets.
opportunistic investors and open-ended funds were the strongest group of sellers, private and international investors were the
In fiscal 2014, the investment market for commercial proper-
most active group of buyers.
ties once again grew significantly (by approx. 30%): The transaction volume in Germany’s commercial property segment, for
According to the Emerging Trends in Real Estate Europe 2015
instance, increased from EUR 30.8 billion in 2013 to EUR 39.8 bil-
study, Berlin is Europe’s most attractive metropolis. Overall,
lion in 2014. Q4/2014 was the strongest quarter of the year. In
the city thus benefits from the pressure on investors to invest.
fact, the final quarter of 2014 contributed more than one-third
Compared with other European cities, Hamburg – which ranked
(over EUR 14 billion) to the annual volume. According to the pub-
fourth – also did very well. From the perspective of investors,
lication of BNP Paribas Real Estate, a leading real estate consult-
however, Munich dropped out of the top 10 locations in Europe
ing firm, all asset classes and locations participated in the posi-
because of the price level and now ranks 11th of a total of 27 Euro-
tive development of the German investment market. Overall, the
pean cities.
share of foreign investors continued to grow and now amounts to nearly 50%. The locations Berlin, Düsseldorf, Frankfurt, Ham-
In Q4/2014, the office performance index “Victor”, which is pub-
burg, Cologne and Munich accounted for significantly more than
lished by JLL, increased by 2.2% to 132.3 compared with the pre-
half of the sales volume.
vious year. In the course of last year, the index increased by 5.1%, which was much more significant than in 2013 (+3.6%). The per-
According to Jones Lang LaSalle (JLL), an international real estate
formance development, which is referred to as yield on change in
service, consulting and investment management firm, office
value, benefited in particular from a demand-driven investment
properties continue to be the strongest segment (accounting
market at the prime sites of Germany’s major office property loca-
for a share of 44% of total sales), followed by retail properties
tions. Victor provides information on increases in rents and prop-
with 22% and logistics properties with a share of 9%. Overall,
erty values for prime office sites in the cities of Berlin, Hamburg,
portfolio transactions continued to gain ground in 2014 and now
Frankfurt, Munich and Düsseldorf. In Q4/2014, rents and values
account for a share of approx. 30%.
increased most rapidly in Düsseldorf’s banking district and in Munich’s city centre, where the growth rate amounted to 2.3%.
According to “Trendbarometer Immobilien-Investmentmarkt
This was followed by Frankfurt’s banking district (+2.2%), Berlin’s
Deutschland 2015” (Barometer of Trends in the German Property
city centre (+2.0%) and Hamburg’s city centre (+1.7%). Year-on-
Investment Market 2015), a report published by Ernst & Young
year, Munich is at the top (+7.3%), followed by Hamburg (+6.6%),
Real Estate GmbH in January 2015, demand in 2014 was once
Düsseldorf (+5.5%), Frankfurt (+3.5%) and Berlin (+3.4%).
DO DEUTSCHE OFFICE AG
2014 ANNUAL REPORT
45
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COMBINED MANAGEMENT REPORT 2. ECONOMIC REVIEW
In 2014, Germany’s office letting market increased by 3% to
2.3. BUSINESS PERFORMANCE OF DEUTSCHE OFFICE GROUP
3.02 million sq.m. However, the development in the local markets varied widely: While the take-up in Berlin (more than
LETTING PERFORMANCE
616,000 sq.m, +36%) was almost equal to the take-up in Munich
In 2014, the Deutsche Office Group once again performed
(approx. 641,000 sq.m, +2.6%), take-up fell by – 22% in Düssel-
strongly in terms of the volume of new lease agreements
dorf (to just below 324,000 sq.m), by – 14% in Frankfurt (to
(45,400 sq.m). Compared with the previous year, the number of
approx. 378,000 sq.m) and by – 13.2% in Cologne (to approx.
new lease agreements concluded increased by nearly 10% (2014:
261,000 sq.m). On the other hand, the office space take-up in
107; 2013: 98). Although only one large-scale leasing agreement
the top office property locations Hamburg and Stuttgart grew
of more than 5,000 sq.m was concluded in 2014, the previous
significantly, at a rate of +19.3% and +8.1%, respectively.
year’s volume of new lease agreements (27,800 sq.m) was clearly surpassed because of a large number of agreements ranging
The vacancy rates in Germany’s seven most important office
between 1,500 and 3,500 sq.m.
locations continued to decline in 2014 and fell by 70 basis points, from 8.3% at the end of 2013 to 7.6% at the end of 2014.
In addition, the Deutsche Office Group successfully extended
Vacancies dropped below the 7-million-square-metre mark to
leases for 125,300 sq.m (2013: 114,700 sq.m) which were due to
6.8 million sq.m at the end of 2014.
expire shortly. This reflects our incumbent tenants’ satisfaction and loyalty due to the intensive and customer-oriented support
Overall, the volume of completions increased by 11% in 2014.
we provide. The extension rate amounted to 70%.
However, this meant that the increase in the volume of newbuilds was lower than had been expected at mid-year. A total
Overall, approx. 18% of the portfolio space was let in 2014 (2013:
of approx. 988,000 sq.m of office space was completed in the
approx. 20%). The percentage decline was due to the addition
course of the year. Two locations accounted for more than half
of the PO REIT properties and the associated increase in the basis
of the volume of new-builds: Frankfurt (approx. 300,000 sq.m)
of assessment.
and Munich (approx. 204,000 sq.m). In 2015, the volume of newbuilds will increase to just above 1 million sq.m, also as a result
STRUCTURE OF LEASES IN 2014
of the postponement of some projects which had been sched-
In fiscal 2014, lease agreements for space of more than
uled for 2014.
1,500 sq.m played a key role, accounting for 59% (2013: 38%) of the total letting performance. Lease agreements for space of less
Prime rents increased by 0.6% in the city centres of the “Big 7”.
than 500 sq.m accounted for 20% (2013: 35%).
Prime rents increased most rapidly in Munich (+4.8%), followed by Stuttgart (+2.7%) and Hamburg (+2.1%). Prime rents only
In 2014, the three largest individual lease agreements included a
declined in Düsseldorf (– 5.5%), while they remained stable in
lease of approx. 5,200 sq.m in the “Feldstrasse” property at Weit-
Berlin, Frankfurt and Cologne.
erstadt to a logistics company, a lease of approx. 3,400 sq.m in the “Richard-Wagner-Platz” property in Nuremberg to a public authority, and a lease of approx. 2,400 sq.m in the “CarlSchurz-Strasse” property at Neuss to an international corporation. The average space of new leases amounted to approx. 424 sq.m per lease (2013: approx. 284 sq.m per lease). A total of 35.2% of the new lease agreements concluded for 45,400 sq.m of space were not concluded in Germany’s seven major office locations, but in cities like Bremen, Darmstadt, Erlangen, Heilbronn,
DO DEUTSCHE OFFICE AG
2014 ANNUAL REPORT
COMBINED MANAGEMENT REPORT 2. ECONOMIC REVIEW
Kaiserslautern, Neuss, Nuremberg, Ratingen and Weiterstadt. Since prospective tenants still have a preference for shorter
KEY FIGURES AND ACHIEVEMENT OF TARGETS IN EUR K (UNLESS OTHERWISE STATED)
2014
2013
CHANGE
105,528
89,346
18%
46,649
40,580
15%
EBITDA1
177,276
70,381
> + 100%
EBIT
171,664
44,378
> + 100%
leases, the average term of new lease agreements amounted to approx. 4.6 years (2013: approx. 6.2 years). AVERAGE LEASE TERM The weighted average lease term (WALT) for all lease agreements amounted to 4.7 years, which is slightly lower than in the previous year (4.9 years). EXPIRING LEASES
Rental income from investment properties FFO
130,531
28,978
> + 100%
EBT
127,665
– 449
> – 100%
Consolidated net income
124,919
1,013
> + 100%
EBDA
2
Due to the follow-on leases achieved and the properties sold
Consolidated net income per share (in EUR)
0.73
0.01
> + 100%
in 2014, the volume of leases which would potentially expire
FFO per share (in EUR)
0.27
0.49
– 45%
in 2015 was reduced from EUR 8.2 million to EUR 4.5 million in annual rental income.
1 2
EBITDA = EBIT adjusted for the result on measurement at fair value EBDA = Consolidated net income adjusted for the result on measurement at fair value
2.4. NET ASSETS, FINANCIAL POSITION AND RESULTS FROM
For the year 2014, rental income from investment properties of
OPERATIONS OF DEUTSCHE OFFICE GROUP (IFRS)
between EUR 112 million and EUR 114 million was forecast, taking
The Consolidated Financial Statements for 2014 are comparable
into consideration the inclusion of PO REIT for the whole twelve-
to the previous year’s statements to a limited extent only. Due to
month period and excluding property sales. In the Group’s
the first-time consolidation based on the merger with PO REIT, a
reports in the second half of the year, this forecast was reduced
total of eleven properties with a market value of EUR 579,138 k
to between EUR 109 million and EUR 111 million because of dis-
were added to the Group at the end of January 2014. On the
posals and re-letting delays. Rental income from investment
other hand, the Group sold three poperties in 2013 and six prop-
properties of EUR 105.5 million and non-consolidated PO REIT
erties in 2014. Although the resulting change in the net num-
income of EUR 2.8 million in January 2014 added up to a total of
ber of properties was only marginal, the Group’s property assets
EUR 108.3 million, just short of the updated forecast. This differ-
and hence all the performance indicators are hardly comparable.
ence was mainly due to lease agreements which did not materi-
In addition, the property in the Group’s portfolio with the third
alise, the redesign of a property in Düsseldorf which took longer
largest revenue potential has had a significant vacancy rate since
than expected and therefore delayed the conclusion of lease
the principal tenant moved out at the end of 2013. Finally the
agreements, along with a difference in variable rents.
effects from the first-time consolidation of PO REIT and the transaction costs associated with the merger and the subsequent capital increase also make it difficult to compare 2014 with the previous year’s figures.
DO DEUTSCHE OFFICE AG
2014 ANNUAL REPORT
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48
COMBINED MANAGEMENT REPORT 2. ECONOMIC REVIEW
With Funds from Operations (FFO) of EUR 47 million, the
Within the framework of the merger, the Group assumed loans
Group surpassed the forecast of between EUR 44 million and
of approx. EUR 330 million. Proceeds from property sales and
EUR 46 million for 2014 despite lower rental income from invest-
substantial proceeds from the cash capital increase in February
ment properties. The increase in FFO was mainly due to much
2014 were used to repay bank loans. Overall, these loan repay-
lower finance costs as a result of improved interest terms.
ments and better refinancing terms have led to only a minor increase in finance costs, while the Group’s property assets grew significantly.
FUNDS FROM OPERATIONS (FFO) FFO, which are cash inflows from the operational management of the property portfolio and are therefore adjusted for special items, can be broken down as follows: IN EUR K
IN EUR K (UNLESS OTHERWISE STATED)
2014
2013
CHANGE
Net rental income
94,156
80,827
16%
Administrative expenses1
– 9,370
– 4,943
90%
66
2,454
– 97%
Other income/other expenses1
– 38,203
Financial result1 Funds from Operations (FFO) 1
46,649
OPERATING EXPENSE ITEMS
– 37,759 40,580
1% 15%
After adjustment for special and one-off items
FFO were adjusted for one-off effects such as income from first-
2014
2013
CHANGE
Rental income from investment properties
105,528
89,346
18%
Non-recoverable service charge expenses
– 11,372
– 8,519
33%
Administrative expenses1
– 9,370
– 4,943
90%
Total operating expenses
– 20,742
– 13,462
54%
19.66%
15.07%
Operating expenses as a percentage of rental income from investment properties 1
After adjustment for special and one-off items
time consolidation (EUR 115,388 k; 2013: EUR 0), transaction costs (in particular property transfer tax) in connection with
The ratio of operating expenses to rental income from invest-
the merger (EUR 23,175 k; 2013: EUR 7,365 k) and expenses for
ment properties deteriorated by 4.59 percentage points, mainly
the redemption and valuation of derivative financial instru-
due to the merger with PO REIT and the cost structures assumed
ments (EUR 5,796 k; 2013: 2,909 k). In the previous year, FFO were
in connection with the merger. Compared with the pro forma
adjusted for non-cash interest expenses for a loan which was
figures for 2013, the ratio deteriorated only slightly due to the
converted to equity at the end of 2013 (EUR 4,159 k).
one-off costs of integration, so that the ratio will improve again in 2015. Deutsche Office underscores its cost leadership with a
In 2014, Net Rental Income increased compared with 2013,
cost ratio of below 20% and an administrative expense ratio of
mainly due to property additions from the merger (EUR +25 mil-
below 9%, with the aim of reducing it to 8%.
lion) despite property disposals and changes in vacancy rates. PROFIT ON DISPOSAL OF PROPERTIES Within the framework of the merger, the Executive Board was
In the year under review, the “Yorckstrasse” property in Düssel-
enlarged by one member, and the workforce increased by seven
dorf, the “Gotenstrasse” property in Hamburg, the “Philipp-Reis-
employees. In connection with the merger, the Company was
Strasse” property in Stuttgart/Fellbach, the two “Hainstrasse”
also listed, with the associated follow-up costs. The increase in
properties in Leipzig and the “Altenessener Strasse” property in
administrative expenses was mainly due to higher personnel
Essen (2013: “Hesslinger Strasse” in Wolfsburg, “Kiesstrasse” in
expenses, legal and consulting fees, as well as higher communication and travel costs.
DO DEUTSCHE OFFICE AG
2014 ANNUAL REPORT
COMBINED MANAGEMENT REPORT 2. ECONOMIC REVIEW
Darmstadt and “Königsallee” in Düsseldorf) were sold, and their
FINANCIAL RESULT
rights and obligations were transferred to the acquirers. Through
The financial result of EUR – 43,999 k was below the previous
these property sales, the Company generated property disposal
year’s level (EUR – 44,826 k) despite the assumption of loans
proceeds of EUR 125,285 k (2013: EUR 30,975 k) and achieved a
from the merger. In the previous year, the financial result included
profit on disposal of properties of EUR 1,104 k (2013: EUR – 358 k).
EUR 4,159 k in non-cash interest expenses for subordinated interest-bearing loans to related entities until the date of contribution
In addition, the Company concluded agreements in 2014 for
to equity. The finance costs were significantly reduced by loan
the sale of the “Gutleutstrasse” property in Frankfurt and the
repayments of EUR 262,344 k and the improved terms obtained
“Hohenzollernring” property in Cologne, and in 2015 for the sale
after refinancing the Homer and Herkules loans.
of the “Ludwig-Erhard-Anlage” (Westend Ensemble) in Frankfurt. The rights and obligations for the “Hohenzollernring” property
Expenses from the redemption of swaps and loans (EUR 1,366 k;
were transferred on 30 January 2015. The rights and obligations
2013: EUR 2,909 k) also decreased. On the other hand, expenses
for the two other properties are expected to be transferred in
from the ineffective portion of derivative instruments increased
Q2/2015. The sales prices of the properties classified as assets
to EUR 4,430 k (2013: EUR 3 k).
held for sale as of 31 December 2014 totalled EUR 92,800 k. The book value includes selling expenses of EUR 1,000 k.
INCOME TAXES In 2014, income taxes amounted to EUR – 2.746 k (expense) (2013:
RESULT ON MEASUREMENT AT FAIR VALUE
EUR 1,462 k) and consisted almost exclusively of deferred taxes.
As of the balance sheet date, the result on measurement at fair value amounted to EUR – 5.612 k (2013: EUR – 26,003 k). Gains
INVESTMENT PROPERTIES
on measurement at fair value amounted to EUR 32,097 k and
The increase in investment properties is mainly due to the
resulted from increases in the value of many properties due to,
merger with PO REIT. The increase in the number of properties
inter alia, much lower interest rates and an associated reduc-
was reduced, as described above, by the disposal of assets due
tion of the discount and capitalisation rates. On the other hand,
to property sales and a slightly negative valuation result. The fol-
losses totalled EUR 37,709 k. The “Ludwig-Erhard-Anlage” prop-
lowing overview shows the development in 2014:
erty and the “Gutleutstrasse” property in Frankfurt, as well as the “Hohenzollernring” property in Cologne, which are classi-
IN EUR K
2014
fied as assets held for sale and which are recognised at their selling prices less selling expenses, account for EUR 13,438 k of
Investment properties as of 1 January 2014
these value reductions. The “Platz der Einheit” property in Frank-
Additions due to first-time consolidation of PO REIT
furt and the “Am Seestern” property in Düsseldorf accounted for
Investments
EUR 15,940 k of the decreases in value. This was due to a delayed
Valuation result
reduction of vacancy rates and to investments made which have
Transactions
1,299,410 579,138 20,359 – 5.612 – 111,489
not yet been reflected by an increase in the value of these prop-
of which disposals from sales
– 18,689
erties. In addition, increases in property transfer tax in Germa-
of which reclassification to ‘assets held for sale’
– 92,800
ny’s federal states Berlin, Bremen, Hesse and North-Rhine Westphalia had an adverse impact on the result on measurement at
Rent smoothing
– 1,146
Investment properties as of 31 December 2014
1,780,660
fair value.
DO DEUTSCHE OFFICE AG
2014 ANNUAL REPORT
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COMBINED MANAGEMENT REPORT 2. ECONOMIC REVIEW
NET ASSET VALUE (NAV) With the merger with PO REIT and the subsequent cash capital increase the Net Asset Value (NAV) more than doubled. However, the NAV per share decreased compared with the previous year, mainly due to the cash capital increase implemented in February 2014 with an issue price of EUR 2.80 per share, i.e. below the NAV per share. IN EUR K (UNLESS OTHERWISE STATED)
2014
2013
IN EUR K (UNLESS OTHERWISE STATED)
Balance sheet total
Interest-bearing loans
37% > + 100% 6%
97,819
41,106
> + 100%
Debt ratio
58.8%
72.3%
Equity ratio
41.2%
27.7%
1,780,660
1,299,410
37% 32%
Other liabilities
CHANGE
37%
Assets held for sale
70,441
32%
Interest-bearing loans1
– 1,050,452
– 927,562
13%
Less cash and cash equivalents2
Cash and cash equivalents
63,503
37,606
69%
Net liabilities to banks
Other assets and liabilities
– 83,487
– 84,886
– 2%
Loan-to-value ratio
Net Asset Value (NAV)
803,024
395,009
> + 100%
1 2
4.82
1,425,505
989,390
1,299,410
4.45
1,951,295
395,009
92,800
Net Asset Value (NAV) per share (in EUR)
CHANGE
803,024
Interest-bearing loans1
1,780,660
Assets held for sale
2013
1,050,452
Equity
Property investments Investment properties
2014
– 8%
92,800
70,150
1,050,452
989,390
6%
48,836
37,606
30%
1,001,616
951,784
5%
53.5%
69.5%
Including loans of properties sold In 2014, less funds reserved for payment of property transfer tax (in 2013, including cash and cash equivalents of properties sold)
INTEREST-BEARING LOANS LOAN-TO-VALUE RATIO (LTV)
The Herkules acquisition loan, which amounted to EUR 472 mil-
The equity ratio improved significantly due to the merger with
lion as of 31 December 2013, was repaid on 20 February 2014
PO REIT and due to the associated cash capital increase, whose
and replaced by the Herkules refinancing loan, amounting to
funds – together with the proceeds from sales – were mainly
EUR 425 million.
used to reduce bank loans; at the end of the year, the equity ratio amounted 41%.
The Homer acquisition loan, which amounted to EUR 456 million as of 31 December 2013, was granted by Landesbank
In 2014, the loan-to-value ratio was already reduced to a level
Hessen-Thüringen (hereinafter referred to as “HeLaBa”) with the
within the medium-term target corridor of between 50 and 55%.
sub-participation of Deutsche Pfandbriefbank (pbb). The loan was repaid on 19 February 2014 and replaced by the Homer refinancing loan, amounting to EUR 370 million. The business combination with PO REIT, which took effect on 21 January 2014, resulted in the assumption of secured loans with a fair value of EUR 330,413 k which, to some extent, were refinanced or extended in 2014. These loans are associated with specific properties and were concluded with different banks.
DO DEUTSCHE OFFICE AG
2014 ANNUAL REPORT
COMBINED MANAGEMENT REPORT 2. ECONOMIC REVIEW
The terms of the loans range from one to five years. More details
Cash flow from financing activities was mainly influenced
are described in the Notes to the Consolidated Financial State-
by the redemption of loans (net repayments) amounting to
ments. We refer to the Risk Report under 3.1. for information on
EUR 262,344 k (2013: EUR 127,814 k) and net inflows of EUR 127,418 k
compliance with financial covenants.
(2013: EUR 0) from the cash capital increase. Proceeds from property sales and, to some extent, the proceeds from the cash capital increase were used to redeem the loans.
INVESTMENTS In fiscal 2014, the Company implemented value-enhancing measures amounting to EUR 20,359 k (2013: EUR 10,846 k).
Cash and cash equivalents include an amount of EUR 5,852 k
Most of these investments were made within the framework
(2013: EUR 3,865 k) for the next interest and principal payment
of new leases. As of 31 December 2014, investment obligations
to banks. Credit balances of EUR 14,786 k (2013: EUR 15,891 k)
amounted to EUR 4,723 k (2013: EUR 2,403 k) for measures to be
are liquidity reserves under loan agreements, earmarked for
implemented in the Group’s property portfolio. The Group will
investments in buildings. In addition, cash and cash equivalents
be able to finance these measures from its own resources.
include EUR 2,565 k (EUR 2,421 k) in rent deposits received from tenants and held in trust by the Group.
CASH FLOW IN EUR K
2014
2013
CHANGE
Cash flow from operating activities
70,342
71,940
– 2%
Cash flow from investing activities
149,701
19,873
> + 100%
Cash flow from financing activities
– 194,146
– 171,683
13%
25,897
– 79,870
> – 100%
0
– 14
n. a.
63,503
37,606
69%
Change in cash and cash equivalents Reclassification of cash and cash equivalents from disposal group Cash and cash equivalents as of 31 December
2.5. NET ASSETS, FINANCIAL POSITION AND RESULTS FROM OPERATIONS OF DO DEUTSCHE OFFICE AG (YEAR-END FINANCIAL STATEMENTS) UNDER THE GERMAN COMMERCIAL CODE (HGB) RESULTS FROM OPERATIONS The net loss for fiscal 2014 amounts to EUR 21,6 million, following a loss of EUR 29.4 million in 2013. This increase is mainly due to impairments of EUR 52,4 million taken in the property portfolio, transfers of EUR 11.6 million to provisions for contingent losses from financial instruments, and EUR 5.0 million for the
Cash flow from operating activities was nearly constant despite
early redemption of loans and derivatives. The previous year was
a significantly higher Net Rental Income due to the transac-
also adversely affected by one-off effects from the transaction
tion costs of the merger paid in 2014 and higher administra-
costs of the merger (EUR 34.4 million) and financial expenses
tive expenses.
from the redemption of loans and derivatives (EUR 35.6 million). Both in 2014 and in 2013, the Company received income from
Cash flow from investing activities increased significantly
write-ups on investments (EUR 51.3 million; 2013: EUR 55 million).
due to the sale of properties (receipts of EUR 125,285 k; 2013:
Without these special items, the Company would have achieved
EUR 30,975 k). In addition, the business combination resulted in a
a break-even result in the fiscal year, as predicted.
net addition of EUR 45,000 k in cash and cash equivalents. On the other hand, the Group – as in previous years – made every effort
Due to the internal mergers with economic effect as of 1 July 2013
to optimise the quality of the facilities of the property portfolio
(effective merger date), all the business transactions of FinCo
and to create incentives to attract new tenants and invested a
GmbH, German Acorn and PO REIT in the period from 1 July to
total of EUR 20,359 k (2013: EUR 10,846 k) in its property assets.
31 December 2013 (and hence only for the second half of fiscal
DO DEUTSCHE OFFICE AG
2014 ANNUAL REPORT
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COMBINED MANAGEMENT REPORT 2. ECONOMIC REVIEW
2013, and for FinCo KG as of 15 November 2013) were included in
The financial result improved in 2014 due to loan repayments
the 2013 Financial Statements of Deutsche Office. Due to the
as a result of property sales and due to improved interest con-
mergers, Deutsche Office, which originally operated exclusively
ditions. In addition, the financial result for 2013 had been bur-
as a holding company, was engaged in operational business over
dened by expenses of EUR 28.6 million for the early redemption
a period of six months in 2013. The disclosures in the Income
of financial instruments in connection with the repayment of
Statement for fiscal 2014 (twelve months of operational activi-
loans as a result of property sales and unscheduled repayments
ties) are therefore comparable to the disclosures of the previous
of PO REIT. In addition, an amount of EUR 7.0 million had to be
year to a limited extent only.
transferred for the first time to provisions for contingent losses for an interest-rate swap as of 31 December 2013 because the
Revenues from leasing properties were generated by the
effectiveness test had been negative.
13 office properties acquired through the merger with PO REIT, two of which were sold in the second half of 2013 and another
FINANCIAL POSITION
in Q1/2014, so that revenues from leases increased by only 76%.
Despite the net loss of EUR 21,6 million, the equity reported as of 31 December 2014 increased to EUR 816 million (2013: 707 million)
Due to the Company’s operational activities over a period of
due to the cash capital increase of EUR 130 million implemented
twelve months, personnel expenses nearly doubled, while the
on 14 February 2014 by issuing 46.6 million shares at a subscrip-
headcount remained almost constant.
tion price of EUR 2.80 per share. (The position “Contributions made to carry out the authorised increase in capital”, reported as
In view of the ongoing sales negotiations on the reporting date
of 31 December 2013, was attributable to equity). In the Financial
and a notarised purchase contract signed on 29 January 2015,
Statements under German GAAP, the equity ratio is approx. 71%,
EUR 43 million was written down for the “Ludwig-Erhard-Anlage”
with a balance sheet total of approx. EUR 1,151 million.
property (Westend Ensemble), Frankfurt/Main, from the scheduled carrying amount of EUR 121 million under German GAAP to
Other accruals mainly include provisions of EUR 12.5 million (2013:
the lower purchase price. In addition, impairments totalling
EUR 23.0 million) for the property transfer tax payments still out-
EUR 9 million were taken on four additional properties because
standing, provisions of EUR 23.8 million (2013: EUR 7.5 million) for
of the planned divestment of all the properties to separate prop-
derivative financial instruments, and property-related provisions
erty companies, all of which are wholly-owned subsidiaries of
of EUR 3.5 million (2013: EUR 3.6 million).
Deutsche Office. Liabilities to banks are related to the financing of PO REIT’s propOther Operating Expenses mainly include legal and consulting
erties and have maturities of up to six years. For short-term lia-
fees (EUR 1.3 million) and the transaction costs of the merger
bilities to banks, we refer to financing and liquidity risks under
(EUR 1.0 million), which were not capitalised as incidental acqui-
“3.2. Risk Report”.
sition costs of the transaction, but were recognised immediately as expenses. In the previous year, these expenses amounted to
NET ASSETS
EUR 34.4 million because, for the purposes of the German Prop-
After regular write-downs and impairments, the value of the
erty Transfer Tax Act, the merger is a taxable acquisition, so that
property assets of Deutsche Office, including property under con-
property transfer tax of approx. EUR 23 million is due on the acqui-
struction, amounted to EUR 537 million as of 31 December 2014.
sition of the ten properties in the portfolio on the date when the
According to CBRE, the market value of these properties, includ-
merger is entered in the Commercial Register. In addition, costs of
ing the purchase price for the “Ludwig-Erhard-Anlage (Westend
a total of EUR 11.4 million were incurred from the due diligence pro-
Ensemble)” property in Frankfurt/Main amounted to a total of
cess, the company’s valuation, the merger audit, an M&A fee, for
EUR 575 million.
the issue of a comfort letter, as well as legal and consulting fees.
DO DEUTSCHE OFFICE AG
2014 ANNUAL REPORT
COMBINED MANAGEMENT REPORT 3. REPORT ON RISKS AND OPPORTUNITIES
The change in financial assets was mainly due to the increase
With reference to the financial reporting process, risk manage-
in loans to affiliated companies, due to the transfer of cash and
ment sees itself as part of the internal control system. The key
cash equivalents from the cash capital increase to repay bank
features of the internal control system and the risk manage-
loans. The loans to affiliated companies were transferred to the
ment system in respect of the (consolidated) financial report-
capital reserves of these companies as of 31 December 2014 and
ing system are listed below.
led to additions of EUR 489 million to shares in affiliated companies. Furthermore value adjustments (EUR 51 million) done in the past on the shares of PortfoliCo II were released due to the
• Clearly defined organisational, corporate, control and monitoring structures,
positive development. • Coordinated Group-wide planning, reporting, controlling and early warning systems and processes for an in-depth analysis
3. REPORT ON RISKS AND OPPORTUNITIES Risks and opportunities are assessed separately in gross terms.
and management of earnings-critical risk factors, • Clear assignment of responsibilties in all areas of the financial reporting process (e. g. financial accounting, controlling),
3.1. RISK MANAGEMENT Deutsche Office or the Deutsche Office Group has a risk management system. The purpose of the risk management system
• Protection of IT systems used in accounting against unauthorised access,
is to identify and assess risks early and completely, mainly at the level of Deutsche Office and at the level of the two subgroups PortfolioCo I and PortfolioCo II. The risk management system ful-
• Predominant use of standard software in the financial systems implemented,
fills a safeguarding function for the Company to achieve sustainable growth and a sustained increase in enterprise value. To this
• Establishment of a system of internal guidelines,
end, identified risks are linked to operational metrics and financial ratios, focusing on performance indicators for vacancies and leases, cash flow, liquidity and balance sheet ratios. Through intensive communication within the Group’s top management, all decision-makers are informed, at all times, about all
• Regular reviews of the completeness and accuracy of accounting data by sampling data and checking their plausibility, • Regular reviews of processes that are relevant for financial reporting,
relevant developments in the Company and within the Group. Developments which diverge from assumptions and emerging risks which may also threaten the Company as a going concern
• Application of the dual control principle to all processes that are relevant for financial reporting,
can thus be detected in time, so that the necessary countermeasures can be adopted. At each of its meetings, the Super-
• The Group uses an external agency to assess the creditwor-
visory Board is given extensive information on all the issues and
thiness of prospective tenants before accepting a new tenant,
developments that are relevant to the Group. • The Supervisory Board deals with key issues pertaining to financial reporting, risk management, audit assignments and priority areas of audits, • The Group-wide risk management system is continually adjusted in response to new developments and its operability is reviewed on an ongoing basis.
DO DEUTSCHE OFFICE AG
2014 ANNUAL REPORT
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COMBINED MANAGEMENT REPORT 3. REPORT ON RISKS AND OPPORTUNITIES
The internal control and risk management system for financial
General amendments to legislation in the property sector cannot
reporting processes ensures that facts are correctly recorded,
be directly influenced by Deutsche Office so that, if legislative
processed, assessed and thus included in the external financial
amendments enter into force which require investments, atten-
reporting process and that financial reporting is consistent and
tion will be focused on business aspects such as supplier screen-
in compliance with legal and statutory requirements and with
ing, tenders and cost control, which will limit the risk under such
the Company’s Articles of Association.
circumstances.
The following measures are adopted by the Executive Board
If one or more of the risks cited above materialise or if other
with regard to financial risk management. Financial instru-
changes in the legal and fiscal environment impinge upon the
ments used by the Deutsche Office Group mainly include bank
Company’s business operations, this might have significant
loans, cash and cash equivalents, and derivative financial instru-
adverse effects on the Company’s net assets, financial position
ments. The primary purpose of these financial instruments is
and results from operations.
to finance properties. The Group has other financial assets and liabilities, such as trade receivables and payables, which arise
MACROECONOMIC ENVIRONMENT IN THE PROPERTY SECTOR
directly from its operations. Furthermore, the Deutsche Office
The German market for commercial properties has historically
Group also enters into derivative contracts in the form of inter-
been subject to significant fluctuations which were related to,
est-rate swaps and interest-rate caps. The purpose of these deriv-
among other things, general economic trends in Germany. Nega-
ative financial instruments is to manage interest-rate risks aris-
tive developments during this period of time temporarily led to
ing from associated loan agreements concluded with variable
high vacancy rates and impairments in the office property seg-
interest rates. The Deutsche Office Group does not trade in inter-
ment. Due to Deutsche Office’s focus on the German commercial
est-rate swaps or caps and will not do so in the future.
property market, and in particular the office property market, adverse trends in this market cannot be offset by positive trends in other markets, countries or in other property sectors. Factors
3.2. RISK REPORT
which influence the Company’s success include the quality and GENERAL AMENDMENTS TO LEGISLATION
financial strength of current and future tenants of the Com-
IN THE PROPERTY SECTOR
pany’s properties, the theoretical option to acquire additional
The Company’s business activities are limited to the German
attractive properties at reasonable prices, the relevant legal
property market. Consequently, Deutsche Office is subject to the
and fiscal framework for such an acquisition, the general per-
statutory rules applying in Germany, in particular in the fields of
formance of Germany’s economy and local conditions. An unfa-
tenancy law, construction law and environmental law. Amend-
vourable development of one or several of these factors could
ments to this legislation at national or at European level and
have significant adverse effects on the Company’s net assets,
changes in the interpretation and application of current provi-
financial position and results from operations.
sions, in particular due to new rulings by courts and administrative authorities, might have an adverse impact on the Com-
INVESTMENT/DIVESTMENT RISKS
pany’s business operations. Changes in tenancy law provisions,
In line with its strategy, the Company will continue to expand its
for instance, might mean that the Company will no longer be
portfolio in the future by adding suitable office properties which
able to charge expenses for the renovation and modernisation
meet its quality requirements in terms of location, property qual-
of buildings or ancillary costs to tenants in the same manner
ity, tenants and cash flow, and make selective property sales to
as before, or that increasing rents or terminating leases will be
free up tied-up capital for additional property purchases. Property
more difficult or more expensive for the Company.
DO DEUTSCHE OFFICE AG
2014 ANNUAL REPORT
COMBINED MANAGEMENT REPORT 3. REPORT ON RISKS AND OPPORTUNITIES
transactions are associated with the risk that decisions may be
Deutsche Office maintains contacts with various banks which
taken on the basis of incomplete information, i.e. without having
qualify as alternative providers of refinancing loans and always
identified all the risks and obligations. The Company addresses
examines alternatives to bank loans. No additional funds will
this risk by applying the greatest possible care within the frame-
have to be borrowed for the vacancies in the portfolio and the
work of a proper due diligence process, to some extent with the
planned revitalisation investments because the Company has
support of external consultants to deal with all material prop-
sufficient cash and cash equivalents. Investment plans are
erty-related and legal issues.
always matched with the liquidity plans to ensure the Company’s solvency at all times. The Executive Board expects that the
In addition, the Company plans to implement extensive revitali-
Company can meet its financial commitments at any time.
sation and conversion measures in various properties in connection with current re-letting requirements. Delays in the execution
COVENANT RISK
of conversion measures can lead to longer vacancy periods or
The Company’s loan agreements include typical financial cove-
claims for damages from third parties (e. g. tenants) if contractu-
nants like a debt service cover ratio (DSCR), a loan-to-value ratio
ally agreed completion deadlines are not met. In addition, there is
(LTV) and a gross yield ratio (GYR).
a risk that budgets may be overrun. The Company addresses the risks associated with investments by means of a comprehensive
If borrowers fail to comply with the financial covenants, the
budgeting process and thorough project controlling, combined
financing banks have the right to terminate the loan agree-
with a careful selection of suppliers.
ments prematurely. Compliance with the financial covenants is carefully monitored on an ongoing basis; if necessary, counter-
FINANCING AND LIQUIDITY RISKS
measures are prepared at an early point in time, and talks are
As at the balance sheet date of 31 December 2014, the Deutsche
conducted with the financing banks. As of 31 December 2014,
Office Group had liabilities from bank loans amounting to
Deutsche Office complied with all the financial covenants, and
EUR 1,050 million.
the Executive Board expects that the Company will also continue to comply with the current financial covenants in the future.
The Herkules refinancing loan, which was granted in February 2014 initially in the amount of EUR 425 million, has a term of
INTEREST-RATE RISK
five years for an amount of EUR 202 million and a term of seven
The Deutsche Office Group pursues a security-oriented financ-
years for an amount of EUR 223 million. The Homer refinancing
ing policy. The loans for the Homer and Herkules portfolios were
loan, which initially amounted to EUR 370 million, will run until
based on EURIBOR rates. As part of the refinancing process carried
30 September 2018.
out in February 2014, derivative instruments were acquired for 80% of the amount of the loan to hedge against a large part of
The property-related loans of the PO REIT portfolios have terms
the interest-rate risk. As a rule, the interest-rate hedges related
of between one and five years. The loan of EUR 10 million for the
to the PO REIT loans were concluded so that the total rate of inter-
“Meerbusch, Earl-Bakken-Platz” property will run until 31 Decem-
est was fixed. The major risks arising from the financial instru-
ber 2015. The Company is currently in negotiations to prolong
ments for the Company and the Group are interest-related cash
the loan. Currently there is no evidence to suggest that this loan
flow risks, liquidity risks and default risks. There is an ongoing
will not be prolonged on fair market terms.
review of the financial instruments acquired in terms of their
DO DEUTSCHE OFFICE AG
2014 ANNUAL REPORT
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COMBINED MANAGEMENT REPORT 3. REPORT ON RISKS AND OPPORTUNITIES
mark-to-market valuation and their suitability as a hedge against
In connection with the purchase of new properties, Deutsche
interest-rate changes as well as the unhedged portion. Depend-
Office might be exposed to legal risks, in particular risks under
ing on interest-rate movements, additional interest-rate hedges
construction law, and may suffer damage that is not, or not suf-
will have to be concluded for the unhedged portion, based on the
ficiently covered by insurance.
loan agreements. In this way, the Group protects itself against higher finance costs due to a potential increase in interest rates,
Deutsche Office carefully weighs up legal risks, primarily by
which would have an adverse impact on the return on equity.
assessing them internally and, if necessary, also by means of
With reference to the effects from potential changes in market
scenario simulations. In particular circumstances, the Company
value, please refer to the information provided in the Notes to
also has legal transactions assessed by external experts.
the Financial Statements of Deutsche Office and in the Notes to the Consolidated Financial Statements as of 31 December 2014.
LEGAL TENANT RISKS AND RISKS ARISING FROM THE SALE AND THE DEVELOPMENT OF PROPERTIES
It cannot be ruled out that follow-on loans will only be available
Deutsche Office might be confronted with claims from warran-
at higher interest rates than expected. Interest-rate movements
ties associated with the lease or sale of properties and with the
are mainly influenced by the capital market and the macroeco-
development of properties, without having adequate rights of
nomic environment. A poorer credit rating for Deutsche Office
recourse against third parties. If contract clauses are faulty or
could have an adverse impact on the terms for follow-on loans
if there are changes in legislation, the use of standardised con-
or the extension or renewal of credit lines. The terms of the loan
tracts may lead to claims against Deutsche Office from a vari-
agreement of EUR 35.4 million fixed for the “Ludwig-Erhard-Anla-
ety of contracts, as well as bad debt losses and higher expenses
gen” property in Frankfurt/Main will end on 30 April 2015. The
for the Company.
contractual term of the loan will end on 31 December 2017. Deutsche Office assesses tenant risks, as well as risks from the LEGAL RISKS
sale and the development of properties primarily internally and,
Overall, amendments to legislation, e. g. in tenancy law and envi-
in particular circumstances, reviews matters and legal transac-
ronmental law, might have an adverse impact on the Company’s
tions with the involvement of third parties.
business operations. In addition, claims might be made against Deutsche Office for failure to comply with requirements under
VACANCY RISKS
construction law, or the Company might have to bear the costs
The income of Deutsche Office largely depends on the rental
for contaminated sites, environmental pollution and unhealthy
income from office properties in the Company’s portfolio. If the
hazardous building mateials which have not yet been identified,
vacancy rates of the Company’s properties increase because
or other unplanned costs.
one or more tenants are unable over a longer period of time to meet their payment obligations, entirely or in part, or terminate long-term leases prematurely due to extraordinary circumstances, this might lead to a significant reduction of the Company’s rental income. At the time of reporting, the weighted average lease term (WALT) of the overall portfolio of Deutsche Office was 4.7 years. The “Am Seestern 1” property (0.4 years) in Düsseldorf and a properaty in Eschborn, “Mergenthaler Allee” (0.5 years) have the shortest (weighted) lease maturities.
DO DEUTSCHE OFFICE AG
2014 ANNUAL REPORT
COMBINED MANAGEMENT REPORT 3. REPORT ON RISKS AND OPPORTUNITIES
Deutsche Office has an experienced active asset management
German Arbitration Proceedings Act. This means that the addi-
team with long-standing expertise. The Company maintains
tional cash payment fixed by the court will also be paid to share-
close contacts with its tenants and optimises properties available
holders who have not filed an application in the arbitration pro-
for lease in line with tenant expectations, which leads to high
ceedings. As of the date of the merger notice published by the
tenant satisfaction and, consequently, a high extension rate.
acquiring entity in the Commercial Register, the additional cash payment will have to be made with an annual interest of five per-
PERSONNEL RISKS
centage points above the base lending rate effective at that time.
Deutsche Office limits personnel risks such as staff turnover or
This right to an additional payment of an unlimited amount with
loss of know-how, lack of motivation, insufficient qualifications,
interest, which in itself may be substantial due to the length of
and competition for professionals and executives by pursuing an
the proceedings and the level of the statutory interest rate, might
active HR policy and by communicating openly with its employees.
result in a significant financial burden and hence have a consid-
The Company provides attractive remuneration systems as well
erable adverse impact on the net assets, financial position and
as personalised training and development programmes to retain
results from operations of the Deutsche Office Group. Mutual
employees.
due diligence was performed prior to the merger, and the Company obtained an expert opinion with a view to establishing the
IT RISKS
enterprise values and the exchange ratio. Subsequently, the cal-
Deutsche Office uses Datev, LucaNet and Datawarehouse as IT
culated exchange ratio was subject to a mandatory merger audit
applications Group-wide.
by an independent expert, as prescribed by law. In addition to measures implemented before the litigation to reduce the risk of
Theoretically, there is a risk of a total failure of these applications
an additional cash payment, the Company is receiving legal sup-
which might result in significant disruptions to business pro-
port from external advisors in the current proceedings.
cesses. For this reason, Deutsche Office has contractually agreed with its service providers to ensure fully functional operating,
GENERAL STATEMENT ON RISK EXPOSURE
maintenance and administration processes as well as effective
Within the framework of our risk management, individual risks
monitoring mechanisms which prevent system failure and a
are combined in a general risk overview. With reference to the
potential loss of data.
individual risks described in this report (taking into account the probability of occurrence and the potential scale) as well as the
RISKS ASSOCIATED WITH THE MERGER
total aggregated risk, we assume that these risks do not pose a
Some shareholders of PO REIT, which was dissolved due to the
direct threat to the Company’s future development. Overall, we
merger, have taken the view that the exchange ratio set for for-
were able to improve the risk exposure in the course of fiscal 2014
mer PO REIT shares to shares of the Company was too low at their
compared with the previous year, mainly due to the conclusion of
expense. For this reason, they decided to have the fairness of
the refinancing loans for the Homer and the Herkules portfolios.
the exchange ratio reviewed in judicial arbitration proceedings
The merger with PO REIT and the associated stock market listing
and have filed the necessary applications to the Munich District
in January 2014 along with the capital increase in February 2014
Court for the initiation of such proceedings. After an exchange
also helped to improve the Company’s risk exposure, although
of various written pleadings by the parties to the proceedings,
these measures also resulted in new risks. The sale of the “West-
a first court hearing was held on 12 February 2015. In the event
end Ensemble” property in Frankfurt/Main (a notarised contract
that the court rules in a final decision that the exchange ratio
was concluded on 29 January 2015) has also led to an improve-
has to be improved by means of a cash payment to be made by
ment in the risk exposure of Deutsche Office. Expenses affecting
the Company, such a decision will be effective for and against all
cash flows and net income as well as non-recoverable vacancy-
the shareholders of PO REIT in accordance with Section 13 of the
related ancillary costs will decrease as a result of the sale.
DO DEUTSCHE OFFICE AG
2014 ANNUAL REPORT
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COMBINED MANAGEMENT REPORT 3. REPORT ON RISKS AND OPPORTUNITIES 4. REMUNERATION REPORT AND LEGAL DISCLOSURES 5. DISCLOSURES REGARDING TAKEOVERS PURSUANT TO SECTIONS 289(4) AND 315(4) GERMAN COMMERCIAL CODE (HGB)
3.3. OPPORTUNITIES FOR THE COMPANY’S FUTURE
4. REMUNERATION REPORT AND LEGAL DISCLOSURES
DEVELOPMENT Overall, the Executive Board believes that the Group is well posi-
The Remuneration Report summarises the principles applied
tioned to capitalise on emerging opportunities in the property
in determining the total remuneration of the members of the
letting and investment markets. The Deutsche Office Group is
Executive Board of Deutsche Office and explains the structure
focused on enhancing the value of its property portfolio by pur-
as well as the amount of the Executive Board members’ remu-
suing a tenant-oriented and professional asset management
neration. In addition, the Report describes the principles and the
approach for the properties in its portfolio. Thanks to our effi-
amount of the remuneration paid to the members of the Super-
cient asset management, we will be able to seize opportuni-
visory Board. The Remuneration Report forms part of the Com-
ties in an environment which will continue to be competitive.
bined Management Report and is included in the Corporate Governance Report under “Remuneration Report”.
Our business model is based on an active asset management, with the objective of reducing vacancy rates in the properties
The Corporate Governance Statement pursuant to Section 289a
and to ensure that the properties are let on an ongoing basis.
German Commercial Code is included in the Corporate Govern-
With an EPRA vacancy rate of 17%, based on the potential rent
ance Report under “Corporate Governance Statement pursuant
for vacant space, revenue growth can be achieved merely by
to Section 289a German Commercial Code”.
reducing this vacancy rate. Larger contiguous vacancies could be let, within a short period of time, to single tenants or to a small number of tenants, reducing the Company’s vacancies by approx. 51,600 sq.m, i. e. by approx. 5.7%. In addition, the reduction of vacancies would reduce vacancy costs and, combined
5. DISCLOSURES REGARDING TAKEOVERS PURSUANT TO SECTIONS 289(4) AND 315(4) GERMAN COMMERCIAL CODE (HGB)
with revenue growth, would have a positive impact on the FFO performance.
5.1. COMPOSITION OF SHARE CAPITAL As of 31 December 2014, the share capital totalled EUR 180,529,633
Due to its underlying financing structure, the Deutsche Office
and consisted of 180,529,633 no-par-value bearer shares with a
Group has the necessary flexibility to sell selected properties
pro-rata amount of the share capital of EUR 1.00 per share. The
at a point in time which will generate optimum returns. At the
share capital is fully paid up. There are no other classes of shares.
same time, we monitor the market continuously in search for
All shares carry the same rights and obligations. Each share grants
attractive buying opportunities so as to make investments in
one vote at the Annual General Meeting, except treasury shares
new properties that add value to our portfolio. Combined with
as these do not confer any shareholder rights on the Company.
our active asset management approach, this can generate long-
The voting rights commence when the statutory minimum invest-
term value growth.
ment in the shares has been made. The rights and obligations associated with the shares are described in detail in the provi-
The principal loans and associated derivative financial instru-
sions of the German Stock Corporation Act (AktG), in particular
ments were refinanced or adjusted in 2014. However, this does
in Sections 12, 53(a) ff., 118 ff. and 186.
not apply to all the loans. This means that the Group’s existing loan agreements hold the potential for further improvements in the financial result. Due to the stock market listing in 2014 and the company’s strong performance, Deutsche Office has access to long-term financing on the very attractive market terms currently available.
DO DEUTSCHE OFFICE AG
2014 ANNUAL REPORT
COMBINED MANAGEMENT REPORT 5. DISCLOSURES REGARDING TAKEOVERS PURSUANT TO SECTIONS 289(4) AND 315(4) GERMAN COMMERCIAL CODE (HGB)
At the Company’s Extraordinary Annual Meeting on 23 Septem-
5.4. EXECUTIVE BOARD’S POWERS, IN PARTICULAR THE
ber 2013, the shareholders resolved to increase the share capi-
POWER TO ISSUE OR BUY BACK SHARES
tal by EUR 51,941,345 for the purpose of the merger with PO REIT.
All the powers of the Company’s Executive Board to issue or buy
The capital increase was entered in the Company’s Commercial
back shares are based on appropriate authorising resolutions
Register on 21 January 2014, the day of PO REIT merger.
adopted by the Annual General Meeting. The key provisions of such resolutions are listed below.
Based on the authorisation granted by an amendment to the Articles of Association on 23 September 2013 (Authorised Capi-
AUTHORISATION TO ACQUIRE AND SELL TREASURY SHARES
tal 2013), the share capital was increased on 14 February 2014 by
The Annual General Meeting of 23 September 2013 adopted the
issuing 46,588,288 shares within the framework of a cash capital
following resolution, which entered into force on the effective
increase by EUR 46,588,288.
date of the capital increase in connection with the merger:
5.2. SIGNIFICANT SHAREHOLDINGS
a) The Company is authorised to acquire treasury shares of up
As of 31 December 2014, six Luxembourg companies together
to 10% of the share capital at the time when the resolution
held more than 50% of the Company’s shares.
was passed. The shares acquired under this authorisation, together with other treasury shares which the Company had
For information on the shareholding structure based on the
already acquired or still possesses or which are attributable
available voting right announcements, please refer to the Notes
to the Company pursuant to Sections 71d and 71e AktG, must
to the Financial Statements of Deutsche Office.
not at any time account for more than 10% of the share capital. The authorisation may also be exercised by dependent
5.3. PROVISIONS ON THE APPOINTMENT AND DISMISSAL OF
entities or by entities in which the Company holds a majority
EXECUTIVE BOARD MEMBERS AND AMENDMENTS TO THE
interest or by third parities for the Company’s account or for
ARTICLES OF ASSOCIATION
the account of dependent companies or entities in which the
The appointment and dismissal of members of the Executive
Company holds a majority interest. The authorisation, which
Board is subject to Sections 84, 85 Stock Corporation Act (AktG)
may be utilised on one or several occasions, in whole or in par-
and Article 7 of the Articles of Association. In accordance with
tial amounts, extends until 22 September 2018.
Article 7(1) of the Articles of Assciation, the Company’s Executive Board shall consist of at least two persons. The Supervisory Board
b) The acquisition shall be effected in compliance with the
appoints the Executive Board members and determines the num-
principle of equal treatment (Section 53a AktG) via the stock
ber of members. The Articles of Association do not contain any
exchange or by way of a public purchase offer to all share-
specific provisions for the appointment and dismissal of individ-
holders or an invitation to all shareholders of the Company
ual or all members of the Executive Board.
to submit offers to sell, which must also comply with the principle of equal treatment (Section 53a AktG), subject to
In accordance with Section 179 of the Stock Corporation Act,
the approved exclusion of the right to tender, as specified
amendments to the Articles of Association require a resolution
under (b) (2) below. An acquisition via the stock exchange
to be adopted by the Annual General Meeting. The Annual Gen-
may be effected via a bank or another enterprise meeting the
eral Meeting’s resolution has to be adopted by a majority of the
requirements of Section 186(5) sentence 1 AktG (hereinafter
shareholders who comprise at least three-quarters of the share
collectively: “underwriting bank”) by mandating the under-
capital represented when passing the resolution. In accordance
writing bank to acquire the shares under a specific buy-back
with Article 11(4) of the Articles of Association, the Supervisory
programme.
Board is entitled to make changes which only affect the wording of the Articles of Association. This also include adjustments to the scope of a capital increase from any authorised or conditional capital.
DO DEUTSCHE OFFICE AG
2014 ANNUAL REPORT
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COMBINED MANAGEMENT REPORT 5. DISCLOSURES REGARDING TAKEOVERS PURSUANT TO SECTIONS 289(4) AND 315(4) GERMAN COMMERCIAL CODE (HGB)
(1) If the shares are acquired via the stock exchange, the pur-
c) The authorisation may be exercised for any legally admissible
chase price (not including transaction costs) shall not be
purpose, in particular to pursue one or more of the objectives
more than 10% above or below the arithmetic mean of the
cited under (d) to (i) below.
share prices (closing auction prices for Deutsche Office in XETRA trading or a comparable successor system) on the
d) With the approval of the Supervisory Board and without
Frankfurt stock exchange on the ten consecutive trading
requiring another resolution by the Annual General Meeting,
days prior to the purchase or the date of entering into a
the Executive Board is authorised to retire the treasury shares
commitment to purchase the shares.
acquired on the basis of this authorisation under Section 71(1) No. 8 AktG. The retirement may be limited to a portion of the
(2) If the acquisition is effected by way of a public purchase
shares acquired. The authorisation to retire treasury shares
offer to all shareholders or or an invitation to all sharehold-
can be utilised on one or more occasions. A retirement of
ers of the Company to submit offers to sell, the purchase
shares shall always lead to a capital reduction. In derogation
price paid to the shareholders (excluding transaction costs)
of the above, the Executive Board may resolve that the share
shall not be more than 10% above or more than 20% below
capital will remain unaffected by such retirement and that,
the arithmetic mean of the share prices (closing auction
pursuant to Section 8(3) AktG, the retirement instead will
prices of the shares of Deutsche Office AG in XETRA trading
lead to an increase in the pro rata amount of the share capital
or a comparable successor system) on the Frankfurt stock
represented by the remaining shares. In this case, the Execu-
exchange during the ten consecutive trading days prior to
tive Board is authorised to adjust the number of shares spec-
the publication of the offer or, if the shares are acquired in
ified in the Articles of Association.
any other way, prior to the acquisition. If, after publication of the Company’s public offering, there are substantial devi-
e) The Executive Board is authorised to resell the Deutsche
ations from the offered purchase price or the limits of the
Office shares acquired on the basis of the above purchase
price range, the offer can be adjusted. In this case, the rele-
authorisation via the stock exchange.
vant amount shall be determined by the price on the last trading day prior to the publication of the adjustment; the
f) The Executive Board is authorised to offer the Deutsche Office
limit of 10 above and 20 below the arithmetic mean shall
shares acquired on the basis of the above purchase author-
also be applied to this amount. The volume of the purchase
isation to shareholders by way of an offer addressed to all
offer may be limited. If the shares offered by shareholders
shareholders while safeguarding their pre-emptive rights and
for acquisition by the Company exceed the total amount
respecting the principle of equal treatment (Section 53a AktG).
of the offer made by the Company, the acquisition may be effected at the ratio of the aggregate of the purchase offer
g) The Executive Board is authorised, with the approval of the
to the total amount of shares offered by the shareholders.
Supervisory Board, to sell the shares acquired under the
Provision can also be made for privileged acceptance of a
above purchase authorisation in a way other than via the
small number of shares (up to 50 shares offered per share-
stock exchange or by offering them to all shareholders, pro-
holder) and for rounding in accordance with commercial
vided that the shares purchased are sold for cash at a price
principles so as to avoid fractional shares. Any further right
that, within the meaning of Section 186(3) sentence 4 AktG,
of the shareholders to tender shares shall be excluded. The
is not significantly below the market price for Company
purchase offer may specify additional conditions.
shares of the same class at the time of the sale. This authorisation is limited to a maximum of 10% of Deutsche Office’s share capital at the time when the resolution for this authorisation is adopted at the Annual General Meeting, or – if this
DO DEUTSCHE OFFICE AG
2014 ANNUAL REPORT
COMBINED MANAGEMENT REPORT 5. DISCLOSURES REGARDING TAKEOVERS PURSUANT TO SECTIONS 289(4) AND 315(4) GERMAN COMMERCIAL CODE (HGB)
amount is lower – 10% of the share capital at the time when
As at 31 December 2014, the Company held no treasury shares.
the shares are sold. The authorised volume shall be reduced
It had not made use of the authorisation described above.
by the pro rata amount of the share capital attributable to shares or the option and/or related conversion rights or obli-
AUTHORISED CAPITAL
gations arising from bonds or profit participation rights with
On 23 September 2013, the Annual General Meeting adopted a
conversion and/or option rights (or a combination of these
resolution creating an authorisation which was entered in the
instruments) that have been issued or sold since the issuance
Commercial Register immediately after the entry into effect of
of this authorisation while excluding pre-emptive rights in
the merger on 21 January 2014 and thus became effective. Under
accordance with Section 186(3) sentence 4 AktG, whether
this authorisation, the Executive Board is authorised, with the
applied directly, analogously or mutatis mutandis.
approval of the Supervisory Board, to increase the share capital on one or more occasions by a maximum of EUR 66,970,672
h) The Executive Board is authorised, with the approval of the
(Authorised Capital 2013) until 22 September 2018 by issuing up
Supervisory Board, to offer and/or grant Deutsche Office
to 66,970,672 new no-par-value bearer shares against cash and/
shares acquired on the basis of the above purchase author-
or non-cash deposits. The Authorised Capital 2013 was partly
isation to third parties as part of company mergers or the
utilised in connection with the cash capital increase carried out
acquisition of companies, parts thereof or equity interests in
in February 2014.
companies, including increases in investment holdings, or of other contributable assets such as properties, property port-
On 20 May 2014, the Annual General Meeting adopted a resolu-
folios and receivables from the company.
tion to cancel all of the remaining Authorised Capital (Authorised Capital 2013). At the same time, the Executive Board was
i) The Executive Board is authorised to use Deutsche Office shares,
authorised, with the approval of the Supervisory Board, to
acquired on the basis of the above purchase authorisation, to
increase the share capital on one or more occasions by a maxi-
settle option and/or conversion rights or obligations under
mum of EUR 90,264,816 (Authorised Capital 2014) until 19 May
options and/or convertible bonds and participation rights with
2019 by issuing up to 90,264,816 new no-par-value bearer shares
conversion or option rights (or a combination of these instru-
against cash and/or non-cash deposits.
ments) issued by the Company directly or via a (direct or indirect) company in which it holds a majority interest.
Shareholders will always be granted pre-emptive rights. Said rights may also be granted in such a manner that the new shares
j) The pre-emptive rights of shareholders are excluded, provided
are underwritten by a bank or a company operating pursuant
that the Executive Board uses the Deutsche Office shares pur-
to Section 53(1) sentence 1 or Section 53b (1) sentence 1 or Sec-
suant to the authorisations under (e), (g), (h) and (i). In addi-
tion 53b (7) of the German Banking Act, with the obligation to
tion, the Executive Board may, in the event of a disposal of
offer the shares to the shareholders. The Executive Board is
Deutsche Office shares as part of a sales offering addressed
authorised to exclude the shareholders’ pre-emptive rights, with
to shareholders under (f) above, exclude the shareholders’
the approval of the Supervisory Board, on one or more occasions,
pre-emptive rights for fractional amounts with the approval
entirely or in part, while not exceeding 36,105,926 new no-par-
of the Supervisory Board.
value bearer shares,
k) The above authorisations may be utilised on one or more occasions, individually or collectively, for all or part of the vol-
• to exclude fractional amounts resulting from the subscription ratio from the shareholders’ pre-emptive rights;
ume of the shares acquired.
DO DEUTSCHE OFFICE AG
2014 ANNUAL REPORT
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COMBINED MANAGEMENT REPORT 5. DISCLOSURES REGARDING TAKEOVERS PURSUANT TO SECTIONS 289(4) AND 315(4) GERMAN COMMERCIAL CODE (HGB)
• if the capital increase is made against cash contributions, if
CONDITIONAL CAPITAL
the issue price of the new shares is not significantly below the
Based on a resolution adopted by the Annual General Meeting on
market price of shares of the same class at the time of the final
23 September 2013 and its entry in the Commercial Register on
determination of the issue price, and if the attributable share
21 January 2014, the Company’s share capital was conditionally
of capital of the new shares issued while excluding the share-
increased by up to EUR 25,000,000 by issuing up to 25,000,000
holders’ pre-emptive rights does not exceed 10% of the share
new no-par-value bearer shares (Conditional Capital 2013). The
capital, either at the effective date or at the time this authori-
purpose of the Conditional Capital 2013 is to issue shares for hold-
sation is exercised. This limitation to 10% of the share capital
ers and creditors of convertible bonds and warrant bonds issued
includes the pro-rata amount of the share capital attributable
by the Company until the close of 22 September 2018 under
to shares, under Section 71(1) No.8 (5), Section 186(3) sentence
the authorisation granted by the Annual General Meeting on
4 AktG, sold during the term of the Authorised Capital 2014
23 September 2013.
under an authorisation to sell treasury shares while excluding the shareholders’ preemptive rights. The limit of 10% of
The new shares are to be issued at the conversion or option
the share capital shall also include the pro rata amount of
price to be set in accordance with the detailed provisions of
the share capital which is attributable to shares issued during
the “Authorisation to issue convertible bonds and similar debt”
the term of the Authorised Capital 2014 under other authori-
below. The conditional capital increase will only be imple-
sations to issue Company shares while excluding the share-
mented if conversion or option rights from issued bonds are
holders’ pre-emptive rights in accordance with Section 186(3)
exercised or if conversion or option obligations under such
sentence 4 AktG, whether applied directly or analogously.
bonds are fulfilled, and only insofar as conversion or option
Furthermore, the limit of 10% shall also include the pro rata
rights or conversion or option obligations are not serviced by
amount of the share capital attributable to shares that may
treasury shares, by shares from Authorised Capital or by other
be issued to service bonds with conversion or option rights or
methods of performance.
conversion or option obligations, where the bonds are issued during the term of the Authorised Capital 2014, while exclud-
The new shares are entitled to dividend as of the beginning of
ing the shareholders’ pre-emptive rights in accordance with
the fiscal year in which they are created as a result of the exer-
Section 186(3) sentence 4 AktG applied analogously;
cise of conversion or warrant rights or the fulfillment of conversion obligations; in derogation of the above, the Executive Board
• to fulfil the Company’s obligations from convertible bonds and warrant bonds issued by the Company;
may, with the approval of the Supervisory Board, decide that the new shares are entitled to dividend as of the beginning of the fiscal year for which, at the time when conversion or warrant rights
• in the event of capital increases against non-cash contribu-
are exercised or conversion obligations are fulfilled, the Annual
tions, implemented to issue shares for the purpose of acquir-
General Meeting has not yet adopted a resolution on the appro-
ing companies, parts thereof, interests in companies, other
priation of the distributable profit for the fiscal year.
assets related to an acquisition project, properties and property portfolios.
The Executive Board is authorised to determine the additional details with regard to the implementation of the conditional
The Executive Board is authorised, with the approval of the Supervisory Board, to define the content of the rights attached to the shares as well as the other conditions governing their issuance. The cancellation and the creation of the Authorised Capital as well as the amendent to the Articles of Association were entered in the Commercial Register on 7 July 2014.
DO DEUTSCHE OFFICE AG
2014 ANNUAL REPORT
capital increase.
COMBINED MANAGEMENT REPORT 5. DISCLOSURES REGARDING TAKEOVERS PURSUANT TO SECTIONS 289(4) AND 315(4) GERMAN COMMERCIAL CODE (HGB)
AUTHORISATION TO ISSUE CONVERTIBLE BONDS
i. to exclude fractional amounts from the pre-emptive rights;
AND SIMILAR DEBT On 23 September 2013, the Annual General Meeting adopted the following resolution:
ii. where this is necessary to grant pre-emptive rights to the holders or creditors of conversion and/or option rights, or creditors of bonds with conversion and/or option obligations
(1) Nominal amount, authorisation period, number of shares
and/or participation rights issued or to be issued by the Company or a wholly-owned direct or indirect subsidiary, to the
The Executive Board is authorised with the approval of the
extent to which they would be entitled as shareholders after
Supervisory Board to issue, on one or more occasions, convert-
exercising the conversion and/or option rights or after fulfill-
ible bearer bonds and/or registered bonds and/or bonds with
ing the conversion and/or option obligations, and
warrants and/or profit participation rights with option and/ or conversion rights (or a combination of these instruments)
iii. provided that the issue price is not significantly lower than
with a nominal value of up to EUR 500,000,000 with or with-
the theoretical value of the Bonds determined in accord-
out a specific maturity (hereinafter collectively the “Bonds”)
ance with generally accepted actuarial methods within the
until 22 September 2018 and to grant to the holders of such
meaning of Sections 221(4) (2), 186(3) sentence 4 AktG. How-
convertible bonds the right to convert these bonds into new
ever, this authorisation to exclude pre-emptive rights applies
shares at a pro-rata value of the Company’s share capital of up
only to bonds with rights to shares which, together, must not
to EUR 25,000,000 as detailed in the respective terms for option
exceed 10% of the share capital, neither at the time at which
or convertible bonds or profit participation (hereinafter “Terms”).
this authorisation takes effect nor at the time at which it is
The relevant terms may also provide for mandatory conversion
exercised. The sale of treasury shares shall be included within
at the end of the term or at other times, including the obliga-
this limit, provided that the shares are sold during the term
tion to exercise the conversion or option rights. The Bonds will
of this authorisation while excluding the shareholders’ pre-
be issued against payment in cash.
emptive rights in accordance with Sections 71(1) No. 8 sentence 5 clause 2, 186(3) sentence 4 AktG. The limit of 10% shall
The Bonds may be denominated in euros or or in the legal currency
also include shares issued from Authorised Capital during
of an OECD country, provided that the equivalent euro amount is
the term of this authorisation while excluding pre-emptive
not exceeded. The Bonds can also be issued by entities that are
rights in accordance with Sections 203(2) sentence 2, 186(3)
dependent on the Company or in which the Company holds a
sentence 4 AktG or under other authorisations to issue shares
majority interest; in this case, the Executive Board is authorised
of the Company while excluding pre-emptive rights of the
to assume the guarantee for the Bonds for the entity and to grant
shareholders in accordance with Section 186(3) sentence 4
shares of the Company to the holders of such bond conversion or
AktG, whether applied directly or analogously.
option rights. The issuance of the Bonds can be divided into equal tranches of bonds.
The above authorisations to exclude pre-emptive rights are generally limited to the issue of bonds with conversion or option
(2) Pre-emptive rights and exclusion of pre-emptive rights
rights to shares of the Company accounting for a pro-rata amount not exceeding 20% of the share capital, neither at the
Shareholders will generally be granted pre-emptive rights to
time at which this authorisation takes effect nor at the time at
the Bonds. The Bonds may also be underwritten by one or more
which it is exercised.
banks, with the obligation to offer the Bonds indirectly to shareholders for subscription within the meaning of Section 186(5) AktG (so-called “indirect pre-emptive rights”). However, the Executive Board is authorised, with the approval of the Supervisory Board, to exclude the shareholders’ pre-emptive rights for the Bonds
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COMBINED MANAGEMENT REPORT 5. DISCLOSURES REGARDING TAKEOVERS PURSUANT TO SECTIONS 289(4) AND 315(4) GERMAN COMMERCIAL CODE (HGB)
(3) Conversion rights, conversion obligations
(5) Conversion/option price
If bonds are issued with conversion rights, creditors may convert
The conversion or option price to be determined for one share
their bonds or participation rights into shares of the Company in
must either be at least 80% of the average closing auction price
accordance with the Terms. The pro-rata amount of the share cap-
of Deutsche Office’s shares in XETRA trading (or a comparable
ital attributable to the shares to be issued upon conversion shall
successor system) on the ten trading days in Frankfurt/Main
not exceed the nominal amount of the convertible bond or con-
prior to the day of the Executive Board’s resolution on the issue
vertible participatory rights or an issue price below the nominal
of Bonds, or at least 80% of the average closing auction price
amount. The exchange ratio is calculated by dividing the nominal
of Deutsche Office’s shares in XETRA trading (or a functionally
amount or an issue price below the nominal amount of a bond
comparable successor system) during (i) the days on which the
by the fixed conversion price for one share of the Company. The
subscription rights are traded on the Frankfurt stock exchange,
exchange ratio may be rounded up or down to a whole number;
with the exception of the last two days of subscription rights
furthermore, an additional payment in cash may also be stipu-
trading, or (ii) the days from the beginning of the subscription
lated. In addition, provisions may be made for fractions to be com-
period until the date of the final determination of the subscrip-
bined and/or to be compensated in cash. The Terms may provide
tion price.
for a variable exchange ratio. If Bonds are issued with a conversion/option obligation, the conIn the case of a conversion obligation, the Company may be
version/option price can at least amount to the above mentioned
authorised in the Terms to compensate in cash, entirely or in part,
minimum price or the average closing price of Deutsche Office’s
for any difference between the nominal amount of the convert-
shares in XETRA trading (or a comparable successor system) before
ible bond or participation right with conversion obligation and
or after the date of maturity of the Bonds, even if this average
the result obtained from multiplying the exchange ratio with the
price is below the above-mentioned minimum price (80%).
market price of the shares, to be specified in the Terms, at the time of the mandatory exchange. Within the meaning of the sentence
Without prejudice to the provisions of Section 9(1) AktG, the
above, the market price to be used in the calculation shall be at
Terms of the Bonds may provide for anti-dilution clauses in the
least 80% of the market price for the shares relevant for the lower
event that the Company increases its share capital during the
limit of the conversion price in accordance with (5) above.
conversion or option period while granting pre-emptive rights to its shareholders, or if the Company issues additional convertible bonds, bonds with warrants and/or participation rights with
(4) Option rights
option or conversion rights, or grants or guarantees other option If bonds with warrants are issued, one or more warrants will be
rights, where the holders of conversion or option rights are not
attached to each bond entitling the holder to subscribe for shares
granted pre-emptive rights to the extent they would be entitled
of the Company in accordance with the terms and conditions as
to after exercising their conversion or option rights or after ful-
determined by the Executive Board. The pro-rata amount of the
filling a conversion/option obligation. The Terms may also pro-
share capital attributable to the shares to be subscribed for per
vide for the conversion and/or warrant price to be adjusted if
bond must not exceed the nominal amount of the warrant bond.
the Company implements other measures that might lead to a dilution in the value of conversion or option rights. In any case, the pro-rata amount of the share capital attributable to the shares to be subscribed for per Bond must not exceed the nominal amount of the Bond.
DO DEUTSCHE OFFICE AG
2014 ANNUAL REPORT
COMBINED MANAGEMENT REPORT 5. DISCLOSURES REGARDING TAKEOVERS PURSUANT TO SECTIONS 289(4) AND 315(4) GERMAN COMMERCIAL CODE (HGB)
(6) Other structuring options
In the Homer refinancing agreement of 19 December 2013, a change-in-control clause was agreed which entitles the consor-
The Terms may provide that, when conversion or option rights
tium leader to terminate the loan agreement without notice if a
are exercised, the Company may also award treasury shares,
party other than Oaktree Capital Group LLC gains control over a
shares from the Company’s Authorised Capital or other ben-
borrower or certain subsidiaries of the Company without prior
efits. The Terms may also provide that the Company will not
approval by the consortium leader. In this context, control means
award shares of the Company to holders of conversion and/or
that a person or group of persons acting together, directly or
option rights, but shall pay the equivalent in cash. The Terms of
indirectly, holds more than 50% of the shares and/or the voting
the Bonds may also stipulate that the number of shares or con-
rights or has the authority to appoint the majority of the mem-
version rights to be subscribed for upon exercise of the option or
bers of the management or of the Executive Board and/or the
conversion rights or after fulfilment of the conversion or option
shareholders’ representatives on the Supervisory Board. Further-
obligations is variable and/or that the option or conversion price
more, a company is regarded as controlled, directly or indirectly,
can vary within a fixed range to be defined by the Executive
by a person if said company is included in the consolidated finan-
Board depending on the share price performance or due to anti-
cial statements of that person in accordance with the accepted
dilution provisions during the term of the issue.
accounting principles of the home country.
(7) Authorisation to establish the other terms and conditions
In addition, a loan agreement which was concluded to finance
of the Bonds
the “Essen, Opernplatz” property also contains a change-in-control clause according to which the loan shall be repaid with an
The Executive Board is authorised to establish the additional
early prepayment penalty if the borrower and the bank cannot
details for issuing and structuring the Bonds, including the inter-
agree on how to deal with a change in the shareholder structure.
est rate, issuing price, term and denomination, the conversion and/or option price and the conversion and/or option period, or
5.6. COMPENSATION AGREEMENTS WITH THE EXECUTIVE
to do so in agreement with the executive bodies of the Group
BOARD AND EMPLOYEES IN THE EVENT OF A TAKEOVER BID
companies issuing the Bonds.
Mr Overath has the right to terminate his contract of employment in the event of a change in control. When this right is exercised,
The Executive Board has not made use of the authorisation to
the compensation paid will amount to three years’ remuneration,
issue the above convertible bonds and/or warrant bonds.
however not exceeding the gross remuneration for the remaining term of the employment contract.
5.5. AGREEMENTS PROVIDING FOR THE EVENT OF A CHANGE IN CORPORATE CONTROL
The management contract with Mr von Cramm contains a com-
In the event of a change in control, all amounts outstanding
mitment for payments to be made in the event of a premature
under the Herkules refinancing loan concluded on 18 Decem-
termination of his service as a member of the Executive Board due
ber 2013 will be due for immediate repayment. Under the loan
to a change in control. These payments shall not exceed 150% of
agreement, such change of control is triggered, among other
the cap on severance payments or the sum total of his remuner-
things, (i) if a third party (with the exception of Oaktree Fund
ation until the end of the agreed residual term of the contract.
Capital Group LLC) directly or indirectly purchases at least 50% of the shares of the Company, (ii) another third party (directly or indirectly) holds more than 50% of the voting rights in the Company, holds more than 50% of the shareholder loans taken out by the Company or has the right to appoint more than half of the members of the Executive Board, or the PortfolioCo II is no longer fully held (directly or indirectly) by the Company.
DO DEUTSCHE OFFICE AG
2014 ANNUAL REPORT
65
66
COMBINED MANAGEMENT REPORT 6. RELATED PARTY DISCLOSURES 7. STATEMENT OF EVENTS AFTER THE REPORTING DATE 8. OUTLOOK
5.7. OTHER DISCLOSURES
8. OUTLOOK
The other disclosures required under Sections 289(4) and 315(4) HGB relate to circumstances that do not apply to Deutsche Office.
MACROECONOMIC DEVELOPMENT
There are no restrictions on voting rights or on the transfer of
After a substantial increase in industrial production in Q4/2014
shares, and there are no holders of shares which confer special
and significant improvement in sentiment among companies,
control rights, or controls on voting rights by employees hold-
which have led to an improvement of the key sentiment indi-
ing equity in the Company.
cators such as the ifo Business Climate Index and the economic forecast of the Center for European Economic Research (ZEW), the economic recovery is expected to continue. In this context,
6. RELATED PARTY DISCLOSURES
the weak exchange rate of the euro and the low oil price have a positive impact on the economic development in Germany.
The Executive Board has prepared a separate report, pursuant
In addition, the development of the labour market continues
to Section 312 AktG, on its relations with affiliated companies
to be positive, so that the high level of employment and rising
which ends with the following statement:
real income provide additional stimuli for domestic demand.
“Under the circumstances known to the Executive Board at the
Leading economic researchers and economic research insti-
time when legal transactions were executed with affiliated
tutes expect growth rates of between 1.0 and 1.5% for the Gross
companies, DO Deutsche Office AG (formerly: Prime Office AG),
Domestic Product in 2015. The German Council of Economic
Cologne, received appropriate consideration for each legal trans-
Experts expects +1.0%, the IMF +1.3%, and the ifo Institute as well
action and did not suffer any disadvantages as as result of the
as the German government expect that GDP will grow by 1.5%.
measures specified in the report.” DEVELOPMENT OF THE PROPERTY SECTOR IN GERMANY Information about related companies and persons can be found
In January 2015, Ernst & Young Real Estate GmbH published the
in the Notes. Information about the remuneration of the Super-
“Trendbarometer Immobilien-Investmentmarkt Deutschland
visory Board and the Executive Board members is provided in the
2015” (Barometer of Trends in the German Property Investment
Remuneration Report.
Market 2015). According to this publication, the property transaction volume will continue to increase in 2015. Overall, the “Trend Barometer” suggests that the investors’ risk appetite will grow.
7. STATEMENT OF EVENTS AFTER THE REPORTING DATE
In addition, competition will increase due to additional capital from Asia. The German property market will continue to be
Under a purchase agreement dated 29 January 2015, the “Lud-
in the focus of international investors; there will be a growing
wig-Erhard-Anlage” property in Frankfurt/Main was sold for
shortage of supply, which will lead to rising prices.
a purchase price of EUR 82,000 k. If the purchase price is fully paid prematurely by 30 April 2015, the price will be reduced
According to its Property and Investment Market Report for Ger-
to EUR 78,000 k. The rights and obligations have not yet been
many, the international property consulting firm JLL expects that
transferred.
prime yields will continue to decrease by 10 to 15 basis points in 2015. In 2014, the average reduction of prime yields amounted to
The rights and obligations of the “Hohenzollernring” property
4.45%. Because of the continuing demand for prime office space
in Cologne, which was sold under a purchase agreement dated
in central locations, JLL expects that the Index for Prime Office
21 November 2014, were transferred on 1 February 2015.
Rental Values will continue to rise by approx. 1% in the top 7 office locations. Average rents in the seven office locations are expected to increase by approx. 2%. JLL does not expect any change in the
DO DEUTSCHE OFFICE AG
2014 ANNUAL REPORT
COMBINED MANAGEMENT REPORT 8. OUTLOOK
vacancy rate for 2015, which means that it will be at approx. 7.6%,
EXPECTED FINANCIAL POSITION IN 2015
as in 2014, although JLL expects a slight increase in the volume of
The planned capital expenditure required to make value-adding
completions to just above 1 million sq.m.
investments in the properties in our portfolio can be financed from operating cash flow and from available liquidity reserves.
It is not possible to predict whether political developments such
Due to loan repayments and a stablised portfolio, we expect a
as the conflict in Ukraine or the crisis in Greece will have a nega-
further improvement of the LTV, which will move closer to 50%.
tive impact on economic development. EXPECTED REVENUE AND EARNINGS IN 2014 Based on the properties sold to date, the current portfolio is
Cologne, 24 March 2015
expected to generate rental income from investment properties of between EUR 105 million and EUR 107 million in fiscal 2015.
The Executive Board
In this context, the Executive Board assumes that the decline in rental income due to the properties sold will be nearly offset by the reduction of vacancies. With this plan, we will move one step closer to achieving our target vacancy rate of approx. 10% by the end of 2018. The financial result will once again improve significantly in fiscal
Alexander von Cramm
Jürgen Overath
2015 compared with the previous year, due to loan repayments and the conclusion of refinancing loans in line with current market terms. As a result of this development and a continuing reduction of vacancies in the portfolio, the Executive Board expects that Funds from Operations will increase from approx. EUR 47 million in 2014 to at least EUR 50 million for the full year 2015, despite the properties that have been sold. Deutsche Office plans to sell its directly held properties to wholly-owned subsidiary property companies. In line with the single-asset valuation principle, combined with the principle of prudence, the losses in book value expected from this transaction were already discounted in 2014. The sale of some properties will generate book profits in 2015. Discounting these special items, the Executive Board expects a break-even result in the financial statements under German GAAP because, in future, Deutsche Office will operate as a pure management and service company and will charge a minor profit mark-up to subsidiaries for the main costs.
DO DEUTSCHE OFFICE AG 2014 ANNUAL REPORT
67
68
CONSOLIDATED FINANCIAL STATEMENTS FOR 2014
DO DEUTSCHE OFFICE AG
2014 ANNUAL REPORT
CONSOLIDATED FINANCIAL STATEMENTS FOR 2014
CONSOLIDATED FINANCIAL STATEMENTS FOR 2014
70
CONSOLIDATED STATEMENT OF INCOME
96
6. NOTES TO THE CONSOLIDATED BALANCE SHEET
71
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
96
6.1. INVESTMENT PROPERTIES
72
CONSOLIDATED BALANCE SHEET AS OF 31 DECEMBER 2014
99
6.2. TRADE RECEIVABLES
74
CONSOLIDATED STATEMENT OF CASHFLOWS
100 6.3. OTHER RECEIVABLES AND OTHER ASSETS
76
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
100 6.4. CASH AND CASH EQUIVALENTS
AS OF 31 DECEMBER 2014
100 6.5. ASSETS HELD FOR SALE AND ASSOCIATED LIABILITIES
78
101
6.6. EQUITY
DO DEUTSCHE OFFICE AG (FORMERLY: PRIME OFFICE AG), COLOGNE,
103
6.7. INTEREST-BEARING LOANS
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR 2014
105
6.8. TRADE PAYABLES
105
6.9. OTHER LIABILITIES
78
1. ABOUT THE COMPANY
106 6.10. FINANCIAL INSTRUMENTS
79
2. ACCOUNTING AND VALUATION PRINCIPLES
112
7. OTHER NOTES
79
2.1. BASIS FOR PREPARATION
112
7.1. OTHER FINANCIAL OBLIGATIONS
79
2.2. RECLASSIFICATION
112
7.2. CONTINGENT ASSETS
79
2.3. CHANGES TO ACCOUNTING POLICIES
112
7.3. CONSOLIDATED STATEMENT OF CASHFLOWS
80
2.4. SCOPE OF CONSOLIDATION
112
7.4. RELATED PARTY DISCLOSURES
81
2.5. SIGNIFICANT ACCOUNTING JUDGMENTS, ESTIMATES AND
112
7.5. HEADCOUNT
ASSUMPTIONS
113
7.6. THE EXECUTIVE BOARD
113
7.7. THE SUPERVISORY BOARD
83
2.6. SUMMARY OF KEY ACCOUNTING POLICIES
114
7.8. INFORMATION ON EXPERT FEES / AUDIT FEES
88
3. SEGMENT REPORTING
114
7.9. EVENTS SINCE THE REPORTING DATE
88
4. BUSINESS COMBINATIONS
116
COMPANIES INCLUDED IN THE CONSOLIDATED FINANCIAL
90
5. NOTES TO THE CONSOLIDATED STATEMENT OF INCOME
90
5.1. RENTAL INCOME FROM INVESTMENT PROPERTIES
90
5.2. PROPERTY SERVICING EXPENSES
91
5.3. ADMINISTRATIVE EXPENSES
92
5.4. OTHER INCOME
92
5.5. OTHER EXPENSES
93
5.6. PROFIT ON DISPOSAL OF PROPERTIES
93
5.7. FINANCE COSTS
93
5.8. INCOME TAXES
95
5.9. EARNINGS PER SHARE
STATEMENTS PURSUANT TO SECTION 313 PARA. 2 HGB
DO DEUTSCHE OFFICE AG
2014 ANNUAL REPORT
69
70
CONSOLIDATED FINANCIAL STATEMENTS FOR 2014 CONSOLIDATED STATEMENT OF INCOME
CONSOLIDATED STATEMENT OF INCOME
IN EUR K
Rental income from investment properties
NOTES
2014
20132
5.1.
105,528
89,346
Service charge income Property servicing expenses1
5.2.
Net operating income
23,045
21,164
– 34,417
– 29,683
94,156
80,827
– 4,943
Administrative expenses
5.3.
– 10,352
Other income
5.4.
117,526
4,872
Other expenses
5.5.
– 25,158
– 10,017
176,172
70,739
Interim result
Investment property disposal proceeds
125,285
30,975
Investment property disposal expenses
– 124,181
– 31,333
1,104
– 358
– 5,612
– 26,003
171,664
44,378
Result from disposal of investment properties
5.6.
Loss on measurement at fair value
6.1.
Profit before interest and taxes
Financial income Financial expenses
5.7.
Profit before taxes
Income taxes
5.8.
Net Profit
72
15
– 44,071
– 44,842
127,665
– 449
– 2,746
1,462
124,919
1,013
124,919
1,013
0.73
0.01
Of which attributable to: shareholders of the parent company
Earnings per share: basic and diluted earnings per share (in EUR) 1
2
5.9.
Comparative figures as well as the name of the item have been adjusted respectively combined (prior year: recoverable service charge expenses [EUR – 20,438 k] and non-recoverable service charge expenses [EUR – 9,245 k]). We refer to 2.2. of the notes to the consolidated financial statements. Comparative figures adjusted due to a change in the recognition of deferred tax assets on loss carry forwards. We refer to 5.8. of the notes to the consolidated financial statements.
DO DEUTSCHE OFFICE AG
2014 ANNUAL REPORT
CONSOLIDATED FINANCIAL STATEMENTS FOR 2014 CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
IN EUR K
NOTES
2014
20131
124,919
1,013
6.10.
– 12,948
23,117
0
– 250
5.8.
2,049
– 3,865
Other comprehensive income after tax
– 10,899
19,002
Consolidated total comprehensive infome
114,020
20,015
114,020
20,015
Net profit
Other comprehensive income to be reclassified to the income statement in subsequent periods: Unrecognized gains/losses from derivative financial instruments Loss from measurement of loans at fair value Tax effects from items of other comprehensive income
Of which attributable to: shareholders of the parent company 1
Comparative figures adjusted due to a change in the recognition of deferred tax assets on loss carry forwards. We refer to 5.8. of the notes to the consolidated financial statements.
DO DEUTSCHE OFFICE AG
2014 ANNUAL REPORT
71
72
CONSOLIDATED FINANCIAL STATEMENTS FOR 2014 CONSOLIDATED BALANCE SHEET AS OF 31 DECEMBER 2014
CONSOLIDATED BALANCE SHEET AS OF 31 DECEMBER 2014
IN EUR K
NOTES
31 DEC. 2014
31 DEC. 2013
6.1.
ASSETS 1,780,660
1,299,410
Intangible assets
534
693
Property, plant and equipments
335
176
2,002
0
1,783,531
1,300,279
Investment properties
Derivative financial instruments, non-current portion
6.10.
Non-current assets
Derivative financial instruments, current portion
6.10.
493
0
6.2.
9,399
7,632
Other receivables and other assets
6.3.
1,491
9,526
Income tax receivables
5.8.
78
21
Cash and cash equivalents
6.4.
63,503
37,606
74,964
54,785
Trade receivables
Subtotal current assets Assets held for sale
6.5.
Current assets
DO DEUTSCHE OFFICE AG
2014 ANNUAL REPORT
92,800
70,441
167,764
125,226
1,951,295
1,425,505
CONSOLIDATED FINANCIAL STATEMENTS FOR 2014 CONSOLIDATED BALANCE SHEET AS OF 31 DECEMBER 2014
IN EUR K
NOTES
31 DEC. 2014
31 DEC. 20131
EQUITY AND LIABILITIES Subscribed capital
6.6.
180,530
82,000
Capital reserve
6.6.
401,930
287,432
Other reserves
6.6.
– 12,049
– 1,150
232,613
26,727
Retained Earnings Equity attributable to shareholders of the parent company
803,024
395,009
Total equity
803,024
395,009
0
Interest-bearing loans, non-current portion Derivative financial instruments, non-current portion Deferred tax liabilities
6.7.
972,279
6.10.
42,221
0
5.8.
4,320
4,199
1,018,820
4,199
927,562
Non-current liabilities
Interest-bearing loans, current portion Derivative financial instruments, current portion Trade payables
6.7.
78,173
6.10.
12,153
6,046
6.8.
14,610
23,485
Income tax liabilities
5.8.
750
759
Other liabilities
6.9.
23,765
6,351
129,451
964,203
0
62,094
Subtotal current liabilities Liabilities in connection with assets held for sale Current liabilities
1
6.5.
129,451
1,026,297
1,951,295
1,425,505
Comparative figures adjusted due to a change in the recognition of deferred tax assets on loss carry forwards. We refer to 5.8. of the notes to the consolidated financial statements.
DO DEUTSCHE OFFICE AG
2014 ANNUAL REPORT
73
74
CONSOLIDATED FINANCIAL STATEMENTS FOR 2014 CONSOLIDATED STATEMENT OF CASHFLOWS
CONSOLIDATED STATEMENT OF CASHFLOWS
IN EUR K
NOTES
2014
2013
127,665
– 449
6.1.
5,612
26,003
4.
– 115,388
0
1,171
– 38
1. Cash flow from operating activities Profit before taxes
Adjustments of profit/loss for non-cash transactions Unrealized gains on measurement at fair value Income for business combination Other non-cash income and expenses
227
70
5.6.
– 1,104
358
816
2
5.7.
44,071
44,842
– 72
– 15
Depreciation and loss from disposal of fixed assets Result from disposal of investment properties Transaction costs for refinancing Financial expenses Financial income
Change in net current assets Change in trade receivables Change in other receivables and assets
2,614
208
786
– 6,117
– 56
75
Change in trade payables
– 11,106
6,702
Change in other liabilities
15,191
740
– 85
– 441
70,342
71,940
Changes in income tax receivables
Tax refunds/taxes paid
5.8.
Cash flow from operating activities 2. Cash flow from investing activities Proceeds from divestments of investment properties
5.6.
125,285
30,975
Payments in connections with the divestment of investment properties
5.6.
– 225
– 419
Payments for investments into investment properties
– 10,846
6.1.
– 20,359
Net cash due to business combination
4.
45,000
0
Net cash due to business combination under common control
4.
0
163
149,701
19,873
Cash flow from investing activities
DO DEUTSCHE OFFICE AG
2014 ANNUAL REPORT
CONSOLIDATED FINANCIAL STATEMENTS FOR 2014 CONSOLIDATED STATEMENT OF CASHFLOWS
IN EUR K
NOTES
2014
2013
5.7.
– 40,713
– 42,307
72
15 0
3. Cash flow from financing activities Interest paid Interest received Payments for termination/change in interest rate swaps
6.10.
– 16,690
Proceeds from interest rate swaps
6.10.
3,730
0
Repayment of loans
6.7.
– 1,057,344
– 127,814
Loans
6.7.
795,000
0
Paid transaction costs for refinancing
6.7.
– 5,619
– 1,577
Proceeds from cash capital increase
6.6.
130,447
0
Paid transaction costs for capital increase
6.6.
– 3,029
0
– 194,146
– 171,683
Cash flow from financing acitivities 4. Cash and cash equivalents at the end of the period Net change in cash and cash equivalents
25,897
– 79,870
Cash and cash equivalents at the beginning of the period
37,606
117,490
Cash and cash equivalents at the end of the period
63,503
37,620
of which cash and cash equivalents from disposal group Reported cash and cash equivalents
6.5.
0
14
63,503
37,606
DO DEUTSCHE OFFICE AG
2014 ANNUAL REPORT
75
76
CONSOLIDATED FINANCIAL STATEMENTS FOR 2014 CONSOLIDATED STATEMENT OF CHANGES IN EQUITY AS OF 31 DECEMBER 2014
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY AS OF 31 DECEMBER 2014
IN EUR K
Notes
Equity as of 31 December 2012
SUBSCRIBED CAPITAL
TREASURY SHARES
CAPITAL RESERVES
6.6.
6.6.
6.6.
84
–4
226,375
–4
4
Net profit Other comprehensive income Consolidated total comprehensive income
Purchase treasury shares Capital increase from own funds
81,920
– 81,920
Increase of capital reserve from business combination
182
Increase of capital reserve from contributions of shareholders Equity as of 31 December 2013
142,795 82,000
0
287,432
Net profit Other comprehensive income Consolidated total comprehensive income
Increase of capital reserve from business combination
51,941
Cash capital increase
46,588
114,219 83,859
Costs of capital increase less tax effects
– 2,613
Withdrawals for compensation of loss carried forward and net loss under German GAAP as well as distribution of a dividend
Equity as of 31 December 2014 1
– 80,967
180,530
0
401,930
Comparative figures adjusted due to a change in the recognition of deferred tax assets on loss carry forwards. We refer to 6.6. of the notes to the consolidated financial statements.
DO DEUTSCHE OFFICE AG
2014 ANNUAL REPORT
CONSOLIDATED FINANCIAL STATEMENTS FOR 2014 CONSOLIDATED STATEMENT OF CHANGES IN EQUITY AS OF 31 DECEMBER 2014
OTHER RESERVERS MISCELLANEOUS RESERVE
RETAINED EARNINGS1
TOTAL
– 20,363
7,928
25,714
239,734
19,213
– 211
19,213
– 211
CASHFLOW HEDGE RESERVE
6.6.
1,013
1,013 19,002
1,013
20,015
0 0 182 – 7,717 – 1,150
0
135,078 26,727
124,919 – 10,899
395,009
124,919 – 10,899
– 10,899
124,919
114,020
166,160 130,447 – 2,613 80,967 0 – 12,049
0
232,613
803,024
DO DEUTSCHE OFFICE AG
2014 ANNUAL REPORT
77
78
CONSOLIDATED FINANCIAL STATEMENTS FOR 2014 1. ABOUT THE COMPANY
DO DEUTSCHE OFFICE AG (FORMERLY: PRIME OFFICE AG), COLOGNE, NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR 2014 1. ABOUT THE COMPANY
Of the 49 properties carried at 31 December 2013, a total of six were divested with transfer of rights and obligations in 2014.
DO Deutsche Office AG (formerly: Prime Office AG) (hereinafter
Eleven properties were acquired as a result of the business combi-
“the Company” or “Deutsche Office”) was founded on 20 June
nation with PO REIT. Consequently, on 31 December 2014 the Group
2006 and has been filed with the Register of Companies of the
portfolio comprised 54 properties in total, three of which are clas-
Cologne district court under the number HRB 67370. The regis-
sified as assets held for sale. We refer to the detailed descriptions
tered office for all companies in the Deutsche Office Group is
in “6.5. Assets held for sale and associated liabilities”.
Maarweg 165, 50825 Cologne, Germany. The reporting date is 31 December 2014. The fiscal year is the The merger between the Company and Prime Office REIT-AG of
calendar year.
Munich (PO REIT) was noted in the Commercial Register at the Cologne District Court on 21 January 2014. Upon entry in the
The Consolidated Financial Statements as of 31 December 2014
Commercial Register the Company acquired control over PO REIT,
were signed off by the Executive Board on 10 March 2015 and
so that the business combination between PO REIT and the Group
passed to the Company’s Supervisory Board for approval. The
became effective on 21 January 2014.
Supervisory Board is expected to approve the Consolidated Financial Statements on 24 March 2015.
On 22 January 2014, the Company’s share was introduced to regulated trading on the Frankfurt Stock Exchange.
The financial statements for the prior year were published in the electronic German Federal Gazette.
Cash capital was increased on 14 February 2014, and the proceeds were used, among other things, to complete the refinancing of the Herkules and Homer portfolios. For further details please refer to “6.7. Interest-bearing loans”. On 20 May 2014, the Annual General Meeting resolved to change the Company’s name to “DO Deutsche Office AG”. On 7 July 2014, the Company’s new name was entered in the Commercial Register at the Cologne District Court. The Company and its subsidiaries (the “Group” or “Deutsche Office Group”) operate in the business of acquisition and management of real estate and investment companies. The business activities are focused on Germany. The Group owns real estate throughout Germany. The portfolio mainly comprises office and retail space including two hotels and three nursing homes.
DO DEUTSCHE OFFICE AG
2014 ANNUAL REPORT
CONSOLIDATED FINANCIAL STATEMENTS FOR 2014 2. ACCOUNTING AND VALUATION PRINCIPLES
2. ACCOUNTING AND VALUATION PRINCIPLES
With the exception of this change, the same accounting policies used for the Consolidated Financial Statements as at 31 December
2.1. BASIS FOR PREPARATION
2013 have been applied. Other exceptions are the new standards
The Consolidated Financial Statements consistently apply the
to be applied to accounting periods beginning on 1 January 2014.
principle of historical cost. Exceptions to this rule are investment properties and financial derivatives, which are recorded at fair
NEW AND REVISED STANDARDS AND INTERPRETATIONS
value.
For this reporting year, the Group applied the new and revised IFRS and interpretations listed below. No or no significant effects
The Consolidated Financial Statements have been drawn up in
on the Group’s financials resulted from the application of these
euros. Unless otherwise indicated, all values have been rounded
revised standards and interpretations. The changes are as follows:
up or down to units of a thousand euros (EUR k). In some cases, this may result in minor discrepancies in the tables included in
AMENDMENT TO IAS 32 – OFFSETTING FINANCIAL ASSETS
these Consolidated Financial Statements and in the totals pro-
AND FINANCIAL LIABILITIES
vided in the Notes.
The amendment clarifies the wording “currently has a legally enforceable right of set-off ”. Furthermore, it is more precise
The Consolidated Financial Statements for the Company and its
about the application of offsetting criteria set out in IAS 32 to set-
subsidiaries have been prepared in accordance with the Interna-
tlement systems (e. g. centralised clearing) in which non-simul-
tional Financial Reporting Standards (IFRS) as applied within the
taneous transactions are grossed. This amendment in no way
EU in conjunction with the requirements of German law pursuant
affects the financial reporting methods applied by the Group.
to section 315a para. 1 HGB (German Commercial Code). IFRS 10 – CONSOLIDATED FINANCIAL STATEMENTS 2.2. RECLASSIFICATION
IFRS 10 was published in May 2011 and is to be first applied in
In the present Consolidated Financial Statements service charge
the annual period beginning on or after 1 January 2014. The
expenses are no longer shown separately as “Recoverable service
new standard replaces the provisions of the old IAS 27 Consol-
charge expenses” and “Non-recoverable service charge expenses”,
idated and Separate Financial Statements on group reporting
but have been combined under “Property servicing expenses”.
and the interpretation SIC–12 Consolidation – Special Purpose
The comparison period has been adjusted correspondingly in
Entities. IFRS 10 builds on a uniform principle of control which
each case.
is applied to all companies, including special purpose entities. June 2012 then saw publication of the revised transition guid-
2.3. CHANGES TO ACCOUNTING POLICIES
ance on IFRS 10 – 12, designed to make applying the new stand-
In contrast to the IFRS Consolidated Financial Statements for the
ards easier. The changes implemented by IFRS 10 require manage-
year ended 31 December 2013, the recognition of deferred tax
ment to use considerable discretion, compared with the previous
assets from loss carryforwards takes into account the German
rules, in assessing where control is exercised over a company and
minimum taxation rule, providing that the excess of deferred tax
whether it should therefore be fully consolidated in the Consoli-
liabilities is an indication of recoverability. The comparison period
dated Financial Statements. IFRS 10 has no impact on the classi-
has been adjusted correspondingly. The change in accounting pol-
fication of investees currently held within the Group.
icy was a consequence of the agenda decision of the IFRS Interpretation Committee as of May 2014. The adjustment was made retroactively as of 1 January 2013. We refer to “5.8 Income Taxes” and “6.6 Equity”.
DO DEUTSCHE OFFICE AG
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CONSOLIDATED FINANCIAL STATEMENTS FOR 2014 2. ACCOUNTING AND VALUATION PRINCIPLES
IFRS 12 – DISCLOSURE OF INTERESTS IN OTHER ENTITIES
IFRS 15 – REVENUE FROM CONTRACTS WITH CUSTOMERS
IFRS 12 sets out the obligations to disclose the interests a com-
IFRS 15 – Revenue from Contracts with Customers – was published
pany holds in subsidiaries, joint arrangements, associates and
on 28 May 2014. In line with the new standard, revenue is recog-
structured entities. The disclosure requirements relating to sub-
nised to depict the transfer of committed goods or services to cus-
sidiaries are more comprehensive than they were under the pre-
tomers in an amount that reflects the consideration to which the
vious rules. They include, for example, subsidiaries where the
entity expects to be entitled in exchange for those goods or ser-
parent company does not hold a majority of voting rights (de
vices. Revenue is recognised as and when the customer acquires
facto control). This Group only has subsidiaries in which the
control over the goods or services. IFRS 15 also contains require-
Company holds the majority of voting rights. There are no uncon-
ments relating to the presentation of contract balances reflect-
solidated structured entities. IFRS 12 disclosures are shown in the
ing performance satisfaction and outstanding obligations. These
Annex to the Notes.
take the form of contract assets or receivables and contract liabilities, depending on the relationship between the entity’s perfor-
The IASB has published further new or revised standards and
mance and the customer’s payment. Moreover, the new standard
interpretations effective in 2014 which have no impact on the
calls for disclosure of quantitative and qualitative information to
Group’s financials.
enable users of financial statements to understand the nature, amount, timing and uncertainty of revenue and cash flows aris-
STANDARDS PUBLISHED BUT NOT YET MANDATORY
ing from contracts with customers. IFRS 15 replaces IAS 11 – Con-
Standards and interpretations announced prior to the publi-
struction Contracts and IAS 18 – Revenue with the related interpre-
cation of the Consolidated Financial Statements which have
tations. The standard is to be applied to annual periods beginning
not yet become mandatory are listed below. The Group intends
on or after 1 January 2017; an earlier adoption is permitted. Except
to apply these standards once they enter into force and not
in the case of sales of properties, the application of IFRS 15 will
prematurely.
have no significant impact, if any, on the Company’s Consolidated Financial Statements, as most of the rental contracts held by the
IFRS 9 – FINANCIAL INSTRUMENTS
Company relate to commercial lets of the real estate it maintains
On 24 July 2014 the IASB published the final version of IFRS 9
as a financial investment. Rental contracts for investment prop-
– Financial Instruments. This completes the project to replace
erties are excluded from the scope of IFRS 15 and fall within the
IAS 39 – Financial Instruments: Recognition and Measurement.
scope of IAS 17. The Company is currently analysing the impact on
IFRS 9 introduces a logical approach for the classification and val-
the Consolidated Financial Statements of applying IFRS 15 in rela-
uation of financial assets driven by cash flow characteristics and
tion to sales transactions.
the business model in which an asset is held, and provides for a new impairment model based on expected credit losses. Fur-
In addition, the IASB has published other changes to (existing) IFRS
thermore, IFRS 9 includes new rules for the application of hedge
which will be mandatory in future years but will have no impact
accounting to better reflect a company’s risk management activi-
on the Consolidated Financial Statements.
ties, especially for non-financial risks. The new standard will have to be applied to annual periods beginning on or after 1 January
2.4. SCOPE OF CONSOLIDATION
2018; an earlier adoption is permitted. The European Financial
The Consolidated Financial Statements represent the finan-
Reporting Advisory Group has delayed its recommendation on
cial statements of Deutsche Office and its subsidiaries as at
the adoption of IFRS 9. The Company is currently analysing the
31 December 2014. The Group controls a subsidiary when the
effects of IFRS 9 on the Consolidated Financial Statements.
Group is exposed, or has rights, to variable returns from its
DO DEUTSCHE OFFICE AG
2014 ANNUAL REPORT
CONSOLIDATED FINANCIAL STATEMENTS FOR 2014 2. ACCOUNTING AND VALUATION PRINCIPLES
involvement with the subsidiary and has the ability to affect
prepared for the same reporting period as for the parent com-
those returns through its power over the subsidiary. In particu-
pany, using consistent accounting policies. All intra-group trans-
lar, the Group controls a subsidiary when, and only when, all the
actions that are recognised in the carrying amount of assets are
following criteria apply:
eliminated in full. Subsidiaries are fully consolidated from the date of acquisition, i. e. the date on which the Group obtains
• power over the subsidiary (i. e. the Group is able, on the basis of its current rights, to influence those activities by the sub-
control. Their consolidation ends as soon as the control over the subsidiary ceases.
sidiary which substantially affect its returns), Alongside Deutsche Office, the consolidation embraces com• exposure or rights to variable returns from involvement in the subsidiary, and
panies in which Deutsche Office directly or indirectly holds the majority of voting rights. The consolidated entities comprise the Company, two domestic subsidiaries and 101 domestic sub-subsid-
• an ability for the Group to use its powers over the subsidiary
iaries (previous year: two domestic subsidiaries and 107 domes-
in such manner as to influence the returns of the subsidiary.
tic sub-subsidiaries). Five domestic sub-subsidiaries were merged into one subsidiary during the year. One domestic sub-subsidiary
Deutsche Office exerts control over the subsidiaries included in
was divested within the framework of a share deal.
the Consolidated Financial Statements in that it directly or indirectly holds a majority of the voting rights in these companies.
The reporting date for the Consolidated Financial Statements is the same as the reporting date for the financial statements of
Acquisitions of companies in terms of the IFRS 3 are accounted
the Company and its consolidated subsidiaries.
for using the acquisition method. This method distributes the acquisition costs of the acquisition to the acquired, individu-
2.5. SIGNIFICANT ACCOUNTING JUDGMENTS, ESTIMATES
ally identifiable assets and liabilities and contingent liabilities
AND ASSUMPTIONS
according to their fair values at acquisition date. Any remaining
When compiling the Consolidated Financial Statements, Man-
positive difference is recognised as goodwill, any negative dif-
agement applies discretionary decisions, estimates and assump-
ference is recognised in income. Incidental acquisition costs are
tions which influence the end-of-period figures for reported
recognised as an expense. The disposal and acquisition of spe-
earnings, expenses, assets and debts and disclosed contingen-
cial purpose entities not constituting a business in the mean-
cies. The uncertainties inherent in these assumptions and esti-
ing of IFRS 3 are presented as a direct purchase or sale of prop-
mates could, however, result in future periods in substantial
erty (asset deal).
adjustments to the book values of the assets or debts concerned.
Income and expenses as well as receivables and liabilities
JUDGMENTS
between the fully consolidated companies are eliminated.
The following judgments made by Management when apply-
Interim results from intra-group deliveries and services that
ing the accounting policies have had the most significant effect
have not been realised by disposal to third parties are removed.
on amounts recognised in the financial statements. Decisions based on estimates are not included.
The Consolidated Financial Statements include the financial statements of the Company and its subsidiaries as of 31 December 2014. The financial statements of the subsidiaries are
DO DEUTSCHE OFFICE AG
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CONSOLIDATED FINANCIAL STATEMENTS FOR 2014 2. ACCOUNTING AND VALUATION PRINCIPLES
OPERATING LEASE COMMITMENTS – GROUP AS LESSOR
The valuation as at 31 December 2014 was performed – as in
The Group has entered into commercial property lease agree-
the previous year – by a property expert applying the DCF (“dis-
ments on its investment property portfolio. Analysis of these
counted cash flow”) method. The DCF method compares all cash
agreements has shown that the Group retains all the signifi-
inflows and outflows associated with the investment property
cant risks and rewards incidental to ownership of these proper-
over a detailed period (ten years) in order to derive the net cash
ties rented out as operating lease.
flows emanating from the property for each year of the period under review. This involves considering a number of parame-
ESTIMATES AND ASSUMPTIONS
ters, such as:
The notes below refer to key assumptions about the future and other significant sources of uncertainty reflected in estimates
• rent levels for initial tenants and follow-on leases,
applied at the reporting date which display a considerable risk
• fitting and finishing costs and lease costs for initial tenants
of triggering a material adjustment to the carrying amounts of
and follow-on leases,
assets and liabilities within the next fiscal year. The assumptions
• vacancy rates and costs,
and estimates used by the Group are based on parameters which
• non-recoverable ancillary costs and expected capital expen-
applied when the Consolidated Financial Statements were prepared. However, these circumstances and assumptions about future developments could alter due to market developments
ditures by the owner, • total returns on the capital employed in the investment, specific to each property and lease.
and circumstances outside the Group’s control. Such changes will only be reflected in the assumptions once they occur.
At the end of the period under review, a sale of the property is simulated and the property is measured using the income
REVALUATION OF INVESTMENT PROPERTIES
capitalisation method, based on an assumption of stable rental
The Group carries its investment properties at fair value as at
income and an appropriate return on investment.
the reporting date, with changes in fair value recognised in the income statement. Investment property is measured by an inde-
Contrary to the DCF method, the income capitalisation method is
pendent property expert on the basis of property-specific and
a static, single-period valuation technique that does not involve
market-oriented parameters. The main property-specific and
an explicit presentation of rent trends over time. The impact of
market-oriented parameters are calculated on the basis of an
changing rents over time and of other market and financial fac-
assessment by the external property expert. Estimates of capi-
tors is implicitly reflected in the capitalisation rate.
talisation rates, expected vacancy rates and future patterns of rental income are especially sensitive to valuation. The costs of
Net present value is calculated by discounting the cash flow
rent incentives and CAPEX measures are recognised on the basis
in the period under review, including proceeds from the simu-
of an assessment by Management which is taken into account
lated sale, to the valuation date, using an estimated discount
by the independent expert.
rate derived from the capital markets.
The fair value of the properties is measured by reflecting the
The market value of the property is then obtained by deducting
ability of market participants to generate economic benefits by
incidental acquisition costs (property transfer tax, notary fees,
making the highest and best use of the property or by selling it
commission) from the net present value.
to another market participant who finds the highest and best use for it.
DO DEUTSCHE OFFICE AG
2014 ANNUAL REPORT
CONSOLIDATED FINANCIAL STATEMENTS FOR 2014 2. ACCOUNTING AND VALUATION PRINCIPLES
This valuation method complies with the Practice Statements
transfer of a liability on the valuation date between market par-
contained in the Valuation Standards (VS 3.2) published by the
ticipants during a regular business transaction. When measuring
Royal Institution of Chartered Surveyors.
the fair value, it is assumed that the transaction during which the disposal of the asset or the transfer of the liability occurs
The market values of Deutsche Office properties correspond to
takes place either
the fair value defined in IFRS 13. • on the principal market for the asset or the liability or We refer to the notes in “6.1. Investment properties”.
• on the most advantageous market for the asset or the liability, if there is no principal market.
DEFERRED TAX ASSETS Deferred tax assets are recognised for all unused tax loss car-
The Group must have access to the principal market or the most
ryforwards insofar as taxable profit is likely to be available
advantageous market.
against which these losses can actually be utilised in line with the minimum taxation rules in Germany. This takes account
The fair value of an asset or a liability is measured based on the
of inter alia expected earnings from operations, the effect on
assumptions that market participants would make when deter-
income of reversing taxable temporary differences, and pos-
mining the price for the asset or liability. It is assumed that market
sible taxation strategies. Based on forecasts of future taxable
participants act in their best economic interest.
earnings, the Executive Board determines the value of deferred tax assets at each reporting date. As future business develop-
The fair value of a non-financial asset is measured by taking into
ments are uncertain and not entirely within management con-
account the ability of market participants to generate economic
trol, assumptions must be made in order to estimate future tax-
benefits by making the greatest and best use of the asset or by
able income and the point in time when deferred tax assets can
selling it to another market participant who finds the greatest and
be realised. Estimated data will be adjusted in the period when
best use for it.
sufficient indications are available to perform such an adjustment. If management concludes that a portion of deferred tax
The Group uses valuation techniques that are appropriate under
assets cannot be realised, whether in part or in full, this por-
the circumstances in question and for which sufficient data are
tion will not be recognised. The planning horizon for this assess-
available to measure fair value. The technique should give maxi-
ment is five years.
mum weight to significant, observable input factors and minimum weight to unobservable input factors.
We refer to the notes in “5.8. Income Taxes”. All assets and liabilities for which the fair value is determined or rec2.6. SUMMARY OF KEY ACCOUNTING POLICIES
ognised in the financial statements are classified in the fair-value
The Consolidated Financial Statements have been prepared on
hierarchy described below, based on the input parameter of the
the assumption that the Company is a going concern.
lowest level relevant for the fair value measurement as a whole:
FAIR VALUE MEASUREMENT
Level 1 − Quoted (unadjusted) prices in active markets for iden-
The Group measures financial instruments, such as deriva-
tical assets or liabilities.
tives, and non-financial assets, such as investment properties, at fair value at each reporting date. The fair value is the price
Level 2 − Valuation methods in which the input factor of the low-
that would be earned for the disposal of an asset or paid for the
est level relevant for the fair value measurement as a whole is observable on the market, either directly or indirectly.
DO DEUTSCHE OFFICE AG
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CONSOLIDATED FINANCIAL STATEMENTS FOR 2014 2. ACCOUNTING AND VALUATION PRINCIPLES
Level 3 − Valuation methods in which the input factor of the low-
TAXES
est level relevant for the fair value measurement as a whole is
CURRENT TAX ASSETS AND LIABILITIES
not observable on the market.
Current tax assets and liabilities for the current and for prior periods are shown as the amount expected to be recovered from
For assets and liabilities recognised on a recurring basis in the
or paid to the tax authorities. The determination of the amount
financial statements, the Group determines whether there have
is based on the tax rates and tax laws applicable on the report-
been any regroupings within hierarchy levels by checking the clas-
ing date or soon afterwards to take effect.
sification at the end of each reporting period (based on the input parameter of the lowest level relevant for the fair value measure-
DEFERRED TAXES
ment as a whole).
Deferred taxes are recognised using the liability method for temporary differences at the reporting date between the carrying
We refer to the notes in “6.1. Investment Properties” and “6.10.
amounts of recognised assets or liabilities and their respective
Financial Instruments”.
tax bases.
REVENUE RECOGNITION
Deferred tax liabilities are recognised for all taxable temporary
Revenue is recognised to the extent that it is probable that the
differences, except:
economic benefits will flow to the Group and the revenue can be reliably measured. Revenue must be measured at the fair value
• where the deferred tax liability arises from the initial rec-
of the consideration received, excluding VAT or other charges.
ognition of goodwill or of an asset or liability in a transac-
The specific recognition criteria listed below must also be met
tion that is not a business combination and, at the time of
before revenue is recognised.
the transaction, affects neither the net profit or loss for the period nor taxable profit or loss; and
RENTAL INCOME Rental income arising from operating leases on investment prop-
• in respect of taxable temporary differences associated with
erty is accounted for on a straight-line basis over the lease term.
investments in subsidiaries, associates and interests in joint ventures, where the timing of the reversal of the temporary
Rent incentives provided to tenants by the Group when a rental
differences can be controlled and it is probable that the tem-
agreement is entered into or prolonged are spread evenly over
porary differences will not reverse in the foreseeable future.
the term of the underlying rental agreement, even if the actual payments occur at a different time. For these purposes, the term
Deferred tax assets are recognised for all deductible temporary
of the rental agreement is determined as the non-cancellable
differences, carryforwards of unused tax credits and unused
portion of the underlying lease term plus any renewal option,
tax losses, to the extent that it is probable that taxable profit
provided that the Executive Board can assume the tenant is more
will be available against which the deductible temporary differ-
likely than not to make use of the renewal option.
ences and the carryforwards of unused tax credits and unused tax losses can be utilised, except:
SALE OF PROPERTY Revenue generated from the sale of property is recognised when all significant risks and rewards incidental to ownership have been transferred to the buyer (transfer of title, risks and rewards).
DO DEUTSCHE OFFICE AG
2014 ANNUAL REPORT
CONSOLIDATED FINANCIAL STATEMENTS FOR 2014 2. ACCOUNTING AND VALUATION PRINCIPLES
• where the deferred tax asset relating to the deductible tempo-
an existing investment property at the time that cost is incurred
rary difference arises from the initial recognition of an asset or
as well as site improvements and tenant-related investments, as
liability in a transaction that is not a business combination and,
long as the recognition criteria are met, and excludes the day-to-
at the time of the transaction, affects neither the net profit or
day costs of servicing of these properties.
loss for the period nor taxable profit or loss; and Subsequent to initial recognition, investment properties are • in respect of deductible temporary differences associated
stated at fair value. This reflects market conditions on the report-
with investments in subsidiaries, associates and interests in
ing date. Gains or losses arising from changes in the fair value of
joint ventures, a deferred tax asset is recognised only to the
investment properties are included in the consolidated income
extent that it is probable that the temporary differences will
statement in the year in which they arise. Fair values are deter-
not reverse in the foreseeable future and no sufficient taxable
mined on an annual basis by an accredited external independent
profit will be available against which the temporary differences
expert in accordance with the valuation model recommended by
can be utilised.
the International Valuation Standards Committee.
The carrying amount of deferred tax assets is reviewed on each
Items of investment properties are derecognised when they have
reporting date and reduced to the extent that it is no longer
either been disposed of or when the investment property is per-
probable that sufficient taxable profit will be available to allow
manently withdrawn from use and no future economic benefit
the benefit of part or all of the deferred tax assets to be utilised.
is expected from its disposal. Gains or losses on the retirement or
Unrecognised deferred tax assets are reassessed on each report-
disposal of investment properties are recognised through profit or
ing date and are recognised to the extent that it has become prob-
loss in the respective year of retirement or disposal.
able that future taxable profit will allow the deferred tax asset to be recovered.
Rent incentives offered to tenants in the form of rent-free periods do not trigger impairments when measuring investment prop-
Deferred tax assets and deferred tax liabilities are measured at
erties at fair value and are thus not reported as a separate asset
the tax rates that are expected to apply in the period when the
but incorporated in the investment property item. Rent incentives
asset is realised or the liability is settled, based on tax rates (and
are released consistently over the term of the underlying rental
tax laws) applicable on the reporting date or soon afterwards to
agreements and accordingly reduce the future rental income from
take effect. Deferred tax relating to items recognised directly in
investment properties.
equity or in other comprehensive income is recognised in equity or in other comprehensive income and not in the income statement.
Gains or losses from the disposal of portfolio properties are determined by subtracting the carrying amount of the property and the
Deferred tax assets and deferred tax liabilities are offset if the
costs of disposal from the disposal proceeds.
Group has a legally enforceable right to set off current tax assets against current tax liabilities and if these relate to income taxes
Borrowing costs related to the acquisition of properties are rec-
declared by the same taxable entity to the same tax authority.
ognised as an expense in the accounting period when they are incurred.
INVESTMENT PROPERTIES Upon initial recognition, investment properties are measured at cost, including transaction or production costs and ancillary costs. The carrying amount includes the cost of replacing part of
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CONSOLIDATED FINANCIAL STATEMENTS FOR 2014 2. ACCOUNTING AND VALUATION PRINCIPLES
INTANGIBLE ASSETS
CASH AND CASH EQUIVALENTS
The Company only recognises acquired intangible assets, which
Cash and cash equivalents in the Balance Sheet comprise cash
are measured at cost and amortised over their respective use-
at banks and short-term deposits with a remaining term of
ful lives using the straight-line method. Useful life is between
up to three months (from date of acquisition). Cash and cash
three and five years.
equivalents also include tenants’ security deposits. These are balanced by liabilities in the same amount presented under
PROPERTY, PLANT AND EQUIPMENT
“Other liabilities”.
Property, plant and equipment are recognised at cost less accumulated depreciation and accumulated impairment losses. The
The cash and cash equivalents presented in the Consolidated
scheduled straight-line depreciation is based on the estimated
Statement of Cash Flows reflect this definition.
useful lives of the assets. The useful life for movable fixed assets is three to ten years.
FINANCIAL LIABILITIES Financial liabilities are either “measured at fair value through
TRADE RECEIVABLES, OTHER RECEIVABLES
profit or loss” or classified as “other financial liabilities”. Fur-
AND OTHER ASSETS
ther information about financial liabilities measured at fair
Trade receivables and other receivables and assets are non-
value through profit or loss will be found in “6.10. Financial
derivative financial assets with fixed or determinable payments
instruments”.
that are not quoted in an active market. After initial recognition, these financial assets are subsequently measured at amortised
Other financial liabilities, including borrowings, are initially rec-
cost using the effective interest rate method and deducting any
ognised at fair value less transaction costs. When calculating
impairment losses. If there are any objective indications of impair-
transaction costs, services such as legal and consultancy fees
ment, the carrying amount is reduced by using an allowance
which are not essential to issuing the liability are not included
account and recognising the impairment loss in the income state-
in determining the fair value of a financial liability. These costs
ment. These items, together with the associated allowance, are
are recognised immediately through profit or loss.
derecognised when there is no realistic prospect of future recovery and all collateral has been realised or liquidated.
After initial recognition, other financial liabilities are subsequently measured at amortised cost using the effective inter-
ASSETS HELD FOR SALE
est method, with interest expenses recognised based on the
Non-current assets intended for disposal under an asset deal are
effective interest rate.
reported separately as held for sale in the Consolidated Financial Statements if a notarised purchase agreement was signed
The effective interest method is a method of calculating the
while the statements were being prepared. If the disposal is to
amortised cost of a financial liability and of allocating the inter-
take the form of a share deal, non-current assets and also other
est expense to the relevant accounting periods. The effective
assets and liabilities held for sale are reported separately in the
interest rate is the rate that discounts estimated future cash pay-
Consolidated Balance Sheet.
ments through the expected life of the financial instrument or, when appropriate, a shorter period to the net carrying amount
Assets held for sale are measured at fair value after deduction
of the financial liability.
of disposal costs on the date of reclassification and on each subsequent reporting date. Gains or losses from measuring individ-
The Group derecognises financial liabilities when the obligation
ual assets held for sale and disposal groups are reported under
under the liability is discharged, cancelled or expired.
income from continuing operations until they have been sold.
DO DEUTSCHE OFFICE AG
2014 ANNUAL REPORT
CONSOLIDATED FINANCIAL STATEMENTS FOR 2014 2. ACCOUNTING AND VALUATION PRINCIPLES
DERIVATIVE FINANCIAL INSTRUMENTS AND
CASH FLOW HEDGES
HEDGE ACCOUNTING
The effective portion of the gain or loss on the hedging instru-
The Group uses derivative financial instruments such as interest
ment is recognised as other comprehensive income and reported
rate swaps and interest caps to hedge against interest rate risks.
under the “Cash flow hedge reserve”, while any ineffective por-
Such derivative financial instruments are initially recognised at
tion is recognised immediately through profit or loss.
fair value on the date on which a derivative contract is entered into and are measured at fair value in subsequent periods. Deriva-
Amounts recognised in other comprehensive income are trans-
tive financial instruments are carried as assets if the fair value is
ferred to the income statement in the accounting period in
positive and as liabilities if the fair value is negative.
which the hedged transaction affects profit or loss, e. g. when the hedged financial income or financial expenses are recog-
Gains or losses from changes in the fair value of derivative finan-
nised or when a forecast sale occurs. If the hedging results in
cial instruments that do not meet the criteria for hedge account-
the recognition of a non-financial asset or non-financial liabil-
ing are recognised directly through profit or loss.
ity, the amounts recognised in other comprehensive income are transferred to the cost of the asset at the time of acquisition of
The fair value of interest rate swap or interest cap contracts
the non-financial asset or liability.
is determined with reference to the market value of similar instruments.
If the forecast transaction or firm commitment is no longer expected to occur, amounts previously recognised in equity or
Hedging instruments are classified as cash flow hedges because
in other comprehensive income are transferred to the income
they address a risk of fluctuations in cash flows that is attribut-
statement. If the hedging instrument expires or is sold, termi-
able to the risk incurred by an unrecognised firm commitment
nated or exercised without replacement or rollover to another
associated with a recognised asset or liability or a highly prob-
hedging instrument, amounts previously recognised in equity or
able forecast transaction.
in other comprehensive income remain in equity as a separate item until the forecast transaction or firm commitment occurs.
At the inception of a hedging relationship, the Group formally
The same applies if it is found that the hedging instrument no
determines and documents the hedging relationship and the risk
longer meets the criteria for hedge accounting.
management objective and strategy with respect to the hedge. The documentation includes the specification of the hedging
LEASES
instrument, the underlying or hedged transaction, the nature
GROUP AS LESSOR
of the risk being hedged and how the entity has determined
Leases where the Group does not materially transfer to the lessee
the hedging instrument’s effectiveness in offsetting the risk of
all the risks and rewards incidental to ownership of the asset are
changes in the underlying transaction’s fair value or cash flows.
classified as operating leases.
Such hedge relationships are considered to be highly effective in offsetting the risks from changes in fair value or in cash flows.
All Group properties are classified as operating leases, because all
They are assessed on an ongoing basis to determine that they
material risks and rewards incidental to the properties owned by
actually have been highly effective throughout the reporting
the Group remain with the Company. Consequently, all the prop-
period for which the hedging relationship was specified.
erties are presented in the financial statements drawn up by the Company as lessor. Income from lease operations is recognised on
Hedges which meet the strict criteria for hedge accounting are
a straight-line basis over the term of the rental agreement after
presented as follows:
factoring in rent-free periods.
DO DEUTSCHE OFFICE AG
2014 ANNUAL REPORT
87
88
CONSOLIDATED FINANCIAL STATEMENTS FOR 2014 3. SEGMENT REPORTING 4. BUSINESS COMBINATIONS
3. SEGMENT REPORTING
should be made for calculating a possible goodwill to the fair value of the shares, as this can be determined more reliably.
IFRS 8 calls for a management approach to identifying operat-
The Company, which was not listed on the stock exchange at
ing segments, with information presented in the same manner
the time of the merger, acquired PO REIT, which had been listed
as for internal management reports.
since 2011. Given the assumption of equilibrium between the two sides of the transaction, recourse is made to such values as
The business activity of the Group consists solely of leasing out
can be more reliably determined. The PO REIT share closed trad-
property to commercial tenants in Germany. In keeping with
ing on the day before discontinuation at EUR 3.199 (XETRA closing
IFRS 8, this constitutes a single reporting segment covering all
price on 20 January 2014). This gives rise to a market capitalisa-
Group operations.
tion of EUR 166,160 k which, in the valuation hierarchy, is hence the yardstick which must be applied in determining the consid-
The reporting for this segment reflects the internal report-
eration transferred. The business acquisition gave rise to a gain
ing submitted to the Executive Board as chief operating
from first-time consolidation (negative goodwill) recognised in
decision-maker.
the Consolidated Statement of Income under other operating income and calculated as follows:
Consequently, the Balance Sheet, the Income Statement and the Statement of Comprehensive Income prepared by the Group are
IN EUR K
FAIR VALUES AT THE DATE OF ACQUISITION
consistent with the single reporting segment constituted by the operation of property leasing to commercial tenants in Germany.
Assets Investment properties
We also refer to “5.1. Rental income from investment properties”.
Intangible assets Propert, plant and equipment
4. BUSINESS COMBINATIONS
Derivative financial instruments (non-current and current)
579,138 24 202 7,026
Trade receivables
4,382
With the entry of the merger in the register of companies, the
Other assets
1,304
Company acquired control over PO REIT, and the business combi-
Income tax receivables
nation is accordingly recognised as of 21 January 2014.
Cash and cash equivalents Assets held for sale
The acquisition costs for the undertaking (fair value of the total consideration transferred) amounted to a total of EUR 166,160 k. The acquisition cost, i. e. the consideration accorded in return for the assets and liabilities transferred from PO REIT, is determined by the value of the company’s shares issued. The PO REIT merger was effected through the issue of 51,941,345 new shares
1 45,000 34,000 671,077
Liabilities Interest-bearing loans (non-current and current) Derivative financial instruments
330,413 48,901
Trade liabilities
8,502
Other liabilities
1,713 389,529
in the Company. IFRS 3.33 requires that, when a business combi-
Total identified net assets as fair value
nation is effected by means of an exchange of shares, to deter-
Transferred consideration
166,160
mine the fair value of the consideration transferred, recourse
Gain from business combination
115,388
DO DEUTSCHE OFFICE AG
2014 ANNUAL REPORT
281,548
CONSOLIDATED FINANCIAL STATEMENTS FOR 2014 4. BUSINESS COMBINATIONS
The gain from the business combination results from the
The date on which the Company gained control over German
requirement to use the low share price to determine the value
Acorn was 11 November 2013, the day the merger agreement
of the consideration. The fair values for assets acquired and lia-
was signed. On that date, the assets and liabilities of German
bilities assumed set out in the table above were subjected to
Acorn were first recognised at their book values in accordance
a reassessment at 31 March 2014, but no need for adjustment
with IFRS. These book values approximate to the fair value of
was identified.
the assets and liabilities. The difference, which was identified as the net assets of German Acorn, was allocated to the Com-
Since the date of acquisition, the properties formerly owned by
pany’s capital reserve.
PO REIT have contributed EUR 29,346 k to Rental Income from Investment Properties. If the business had been combined as of
The book values of German Acorn’s identifiable assets and liabil-
1 January 2014, Rental Income from Investment Properties would
ities at the date control was obtained are as follows:
have amounted to EUR 108,355 k. Following the legal merger between the companies, it is no
BOOK VALUES AT THE DATE CONTROL WAS GAINED
IN EUR K
longer possible to calculate a separate earnings contribution for PO REIT.
Assets Intangible assets
715
Transaction costs of EUR 7,365 k were recognised as expenses
Propert, plant and equipment
224
in 2013 and posted under Administrative Expenses. The trans-
Trade receivables
329
action costs incurred this year, which amounted to EUR 23,175 k
Receivables from related companies
281
and consisted primarily of property transfer tax and consultancy
Other assets and liabilities
fees, were likewise recognised as Administrative Expenses in the
Cash and cash equivalents
25 163 1,737
Statement of Income and as Cash Flow from Operating Activities in the Statement of Cash Flows.
Liabilities Trade liabilities
BUSINESS COMBINATION IN THE PREVIOUS YEAR The merger with German Acorn Real Estate GmbH, Cologne (German Acorn), showed in the financial statements for the previous reporting year as a business combination under common control.
646
Liabilities to related companies
309
Other liabilities
600 1,555
Total identified net assets at book value
182
Allocation to capital reserve
182
No consideration was granted for the transfer of German Acorn’s assets to the Company. Pursuant to section 68 para. 1 sentence 3 Umwandlungsgesetz (“Transformation Act”), the Company has refrained from granting shares as a consideration for the transfer of German Acorn’s assets to the Company. The shareholders of German Acorn waived their right to receive shares in the Company.
DO DEUTSCHE OFFICE AG
2014 ANNUAL REPORT
89
90
CONSOLIDATED FINANCIAL STATEMENTS FOR 2014 5. NOTES TO THE CONSOLIDATED STATEMENT OF INCOME
5. NOTES TO THE CONSOLIDATED STATEMENT OF INCOME
5.2. PROPERTY SERVICING EXPENSES Unlike in the previous reporting year, recoverable service charge expenses (prior year: EUR 20,438 k) and non-recoverable service
5.1. RENTAL INCOME FROM INVESTMENT PROPERTIES
charge expenses (prior year: EUR 9,245 k) have been combined
Rental income from investment properties in the reporting
under “Property servicing expenses”. We refer to the notes in
period breaks down as follows:
“2.2. Reclassification”. The comparison period has been adjusted correspondingly.
IN EUR K
2014
2013
101,572
86,819
7,220
5,523
– 3,264
– 2,996
105,528
89,346
Property servicing expenses break down as follows: Rental income from property leases Rental income from garages Rent-free periods
IN EUR K
2014
20131
Maintenance costs
6,945
5,293
Property tax
5,929
3,266
The rental income from property leases and garages consists of
Electricity costs
3,441
3,072
the nominal rent agreed on in the contract. The negative value
Porter, reception, janitor costs, security
3,318
3,167
for rent-free periods relates to the release of the deferred rent
Hot water and heating costs
3,139
3,558
Property management
2,212
1,691
Non-deductible VAT
1,509
2,476
Cleaning costs
1,335
1,258
Insurance
1,334
869
dentals) received from one tenant for fiscal year 2014 amounts
Winter clearance, street cleaning, external maintenance, irrigation
1,099
1,022
to 13.1% and for a second tenant to 10.5% of all rental income
Water
1,093
781
generated by the Group (previous year: 15.6% generated by one
Refuse and waste disposal
tenant). The two tenants have an immaculate credit rating,
incentives that are released consistently over the term of the underlying rental agreements, reducing revenue in the process. The rental income generated from the net rent (excluding inci-
597
544
Other
2,466
2,686
which means that the credit risk for the Group can be classi-
Total
34,417
29,683
fied as minimal.
1
adjusted to reflect reclassification. We refer to 2.2. in the Notes to the Consolidated Financial Statements
Rental income from property leases contains variable rental income amounting to EUR 5,288 k (previous year: EUR 5,264 k).
Compared with the prior year, property servicing expenses
These are rental agreements in which the rental payments are
increased overall, essentially due to the merger with PO REIT and
linked to the operating results of the tenants.
the resulting increase in the number of properties. Since their acquisition, the PO REIT properties have contributed EUR 9,569 k
Since the date of acquisition, the properties formerly owned by
to the expense of servicing properties. However, these costs
PO REIT have contributed EUR 29,346 k to rental income from
include a property tax expense of EUR 1,987 k incurred prior to
investment properties.
the reporting year, levied by the City of Munich following a subsequent assessment and passed on in full to the tenant.
If the business combination had taken place by 1 January 2014, the rental income from investment properties would have
Property servicing expenses include vacancy costs amount-
amounted to EUR 108,355 k.
ing to EUR 6,519 k (prior year: EUR 3,825 k), costs which are nonrecoverable due to the nature of rental agreements amounting to EUR 1,558 k (prior year: EUR 1,238 k), and costs which cannot be assigned to tenants due to the ordinance regulating service charges, which amounted to EUR 3,591 k (prior year: EUR 4,182 k).
DO DEUTSCHE OFFICE AG
2014 ANNUAL REPORT
CONSOLIDATED FINANCIAL STATEMENTS FOR 2014 5. NOTES TO THE CONSOLIDATED STATEMENT OF INCOME
5.3. ADMINISTRATIVE EXPENSES
An employee participation programme was implemented in fis-
Administrative expenses break down as follows:
cal year 2014 which rewards performance in line with an assessment basis stretched over four fiscal years (Long Term Incentive
IN EUR K
2014
2013
4,944
690
funds from operations (FFO) per share, net asset value (NAV) per
Legal and consulting fees
809
196
share and the Company share price over the next four years. This
Rental and ancillary rental costs
625
3
participation programme could generate personnel expenses for
IT costs
607
113
the Company of up to EUR 625 k in total over the next four years.
Audit costs
508
246
Travel costs
335
122
Depreciation/amortisation
326
36
Insurance/contributions and levies
324
75
Other personnel costs
275
4
0
3,346
management fee of EUR 1,891 k and a service fee of EUR 1,455 k
– “LTI”). The first LTI payment is made after four years. The payment increases or decreases depending on the performance of
Personnel expenses
Management services (incl. asset management)
The charge for pension provisions accounted for EUR 20 k in the reporting year (prior year: EUR 2 k). In the previous year, management services included an asset
Other
1,599
112
for services provided by German Acorn. Following the merger
Total
10,352
4,943
between the Company and German Acorn on 11 November 2013, these charges now fall under intra-Group expenses and income
The increase in personnel expenses and depreciation are a con-
and have therefore been eliminated.
sequence of the business combinations with PO REIT and German Acorn and the resulting assumption of existing employ-
SHARE-BASED PAYMENT
ment contracts and furnishings and equipment. The financial
Share-based payment was introduced to the Group through
statements for the prior year already included pro rata person-
the merger with PO REIT, which had granted performance share
nel expenses and depreciation following the merger with Ger-
units (PSU) as a form of share-based compensation. The vesting
man Acorn on 11 November 2013.
period for these commitments is three years. After the vesting period, the recipient is paid cash equivalent to the value of the
Moreover, the mergers resulted in the assumption of cost of
vested stocks. The equivalent value is derived at the end of the
rooms, travel expenses for transferred staff and other admin-
vesting period from the average share price over three months.
istrative charges, which essentially accounts for the increase in
The amount of this payment also depends on two independ-
Other Administrative Expenses.
ent performance levers: the increase in FFO per share, and outperformance of the DIMAX (German real estate share index)
Due to the closure of the Munich office as of 30 June 2014,
by the Company share. These levers can increase or decrease
Administrative Expenses include special items amounting to
the basic amount paid at the end of the vesting period. Share
a total of EUR 673 k. These are personnel expenses and rental
awards are unaffected if an Executive Board member is recalled
costs, which include not only regular rents but also unavoid-
by the Supervisory Board or if the recipient’s contract termi-
able expenses for the settlement of future financial obliga-
nates. Vested shares expire on grounds of misconduct or if the
tions from the office space rental contract which will run until
Executive Board member is dismissed or resigns.
30 August 2016.
DO DEUTSCHE OFFICE AG
2014 ANNUAL REPORT
91
92
CONSOLIDATED FINANCIAL STATEMENTS FOR 2014 5. NOTES TO THE CONSOLIDATED STATEMENT OF INCOME
In fiscal year 2014 PSUs fell into the following categories.
5.5. OTHER EXPENSES Other expenses break down as follows:
IN UNITS
PSUs IN TEUR
2014
2013
PSUs at the time of the merger
104,007
PSUs retired due to performance levers
– 19,320
Transaction costs for merger with PO REIT
23,175
7,365
PSUs maturing in 2014
– 3,680
PSUs granted for 2014
17,292
Valuation allowances on receivables and losses on receivables
746
744
98,299
Non-deductible VAT
573
147
19,000
Expenses for refinancing of loans
572
234
of which maturing in 24 months
62,007
Other
92
1,527
of which maturing in 36 months
17,292
Total
25,158
10,017
PSUs not yet payable on 31 December 2014 of which maturing in 12 months
The vesting period for 2,530 PSUs maturing in 2014 ended on
The increase in other expenses relates directly to the transac-
30 June 2014. A payment amounting to EUR 8 k was made
tion costs for the merger with PO REIT. In particular, it includes a
in January 2015. The other 1,150 PSUs maturing in 2014 will be
provision for future property transfer tax expected to amount to
paid out in March 2015. The valuation of PSUs that had not yet
EUR 22,623 k. The transaction costs incurred in the previous year
matured was based on the performance levers and linked to the
were associated with preparing and implementing the merger
average daily closing price for DO Deutsche Office AG in XETRA
with PO REIT. This included in particular the costs of due diligence,
trading with Deutsche Börse AG during the three months prior
the business valuation, the merger audit, legal counselling, con-
to the reporting date on 31 December 2014. A sum of EUR 107 k
firmation services and the transaction fee to the consulting bank.
was accordingly allocated at the reporting date. The valuation allowances on receivables and losses on receivables 5.4. OTHER INCOME
relate mainly to tenants who are subject to insolvency or eviction
The other income of EUR 117,526 k (prior year: EUR 4,872 k)
proceedings. The item also includes valuation allowances related
mainly consists of the gain from the business combination of
to disputed invoicing of ancillary costs.
EUR 115,388 k. We refer to the notes in “4. Business combination”. Other major components are income from a warranty claim
The expenses for refinancing of loans comprise in particular con-
worth EUR 661 k (prior year: EUR 0 k), gains from the derecogni-
sultancy fees in connection with the new loans taken out as fol-
tion of time-barred or lapsed liabilities amounting to EUR 577 k
low-on financing for the expired acquisition loans.
(prior year: EUR 1,038 k), income from insurance payouts worth EUR 382 k (prior year: EUR 317 k) and gains from the settlement of outstanding restoration obligations amounting to EUR 298 k (prior year: EUR 2,334 k).
DO DEUTSCHE OFFICE AG
2014 ANNUAL REPORT
CONSOLIDATED FINANCIAL STATEMENTS FOR 2014 5. NOTES TO THE CONSOLIDATED STATEMENT OF INCOME
5.6. PROFIT ON DISPOSAL OF PROPERTIES
The expenses for derivative financial instruments include both
The reporting year saw disposal of the properties on “York-
the reversal through income of the loss recognised in Other
strasse” in Düsseldorf (transfer of rights and obligations on
reserves (cumulative equity) from the instrument formerly
1 January 2014), on “Gotenstrasse” in Hamburg (transfer of rights
used to hedge the acquisition loan for the Homer portfolio
and obligations on 31 January 2014), on “Philipp-Reis-Strasse”
(EUR 1,366 k; prior year: EUR 2,909 k) and expenses from adjust-
in Stuttgart/Fellback (transfer of rights and obligations on
ments to the fair value of the hedging transactions assessed as
18 February 2014), of the two properties on “Hainstrasse” in Leip-
ineffective (EUR 4,430 k; prior year: EUR 3 k). We refer to the notes
zig (transfer of rights and obligations on 1 August 2014) and on
in “6.10. Financial instruments”.
“Altenessener Strasse” in Essen (transfer of rights and obligations on 1 December 2014).
5.8. INCOME TAXES Income tax is attributed as follows:
The sales prices of the properties sold in 2014 amounted to a total of EUR 125,285 k (prior year: EUR 30,975 k), with carrying
CONSOLIDATED STATEMENT OF INCOME
amounts of EUR 122,840 k (prior year: EUR 30,915) and expenses
IN EUR K
2014
20131
Current tax expenses
– 85
– 441
from the disposal of the properties amounting to EUR 1,341 k (prior year: EUR 418 k).
Deferred tax result
5.7. FINANCE COSTS
from temporary differences
Finance costs in the reporting year break down as follows:
Tax result 1
IN TEUR
2014
2013
Interest expenses for Herkules portfolio loan
13,786
20,887
Interest expenses for Homer portfolio loan
10,505
20,539
Interest expenses for Prime Office portfolio loan
13,975
0
5,796
2,912
9
504
44,071
44,842
Expenses from derivative financial instruments Other Total
– 2,661
1,903
– 2,746
1,462
comparative figures adjusted due to a change in the recognition of deferred tax assets from loss carry forwards
The deferred tax result reflects not only the tax effect of gains and losses from the cash flow hedge (ineffective portion) but also the expense for the transaction costs of the cash capital increase worth EUR 491 k, which has been deducted from the capital reserve. OTHER COMPREHENSIVE INCOME (CURRENT INCOME TAX RELATED TO ITEMS RECOGNISED DIRECTLY IN EQUITY) IN EUR K
2014
2013
The significant decrease of interest expenses for the Homer and Herkules loans is mainly due to repayments and improved credit terms following the refinancing carried out during the reporting period. Besides, in the previous year interest of EUR 4,159 k was
Tax effect on gains/losses from cash flow hedges by way of interest hedges
2,049
– 3,865
Tax result recognised in equity
2,049
– 3,865
posted for a loan of initially EUR 150,000 k, raised to finance the Herkules portfolio, which shareholders allocated to the Company’s capital reserve on 26 November 2013. Interest expenses for loans for properties in the Prime Office portfolio result from liabilities to banks derived from the business combination with PO REIT and reflect interest incurred since the acquisition.
DO DEUTSCHE OFFICE AG
2014 ANNUAL REPORT
93
94
CONSOLIDATED FINANCIAL STATEMENTS FOR 2014 5. NOTES TO THE CONSOLIDATED STATEMENT OF INCOME
As in the previous year, the reconciliation between theoretical
CONSOLIDATED BALANCE SHEET
CONSOLIDATED STATEMENT OF INCOME
31 DEC. 2014
2014
9,012
2,714
Measurement of an interest rate swap (ineffective portion)
752
11
Measurement of an interest rate cap (ineffective portion)
315
315
0
– 142
2,265
0
12,344
2,898
income tax based on pre-tax earnings and reported income tax is based on a taxation rate of 15.83% (15.0% as the rate of corporate income tax and 5.5% solidarity surcharge): IN EUR K
2014
IN EUR K 20131 Deferred tax assets
Profit/loss before income taxes
127,665
– 449
15.83%
15.83%
Theoretical tax income (+)/ tax expense (-)
– 20,203
71
Effect of (un)recognised deferred tax assets due to temporary differences
– 2,028
280
Effect of (un)recognised deferred tax assets on loss carryforwards
1,365
2,361
Non-deductible interest expenses
– 333
– 720
Permanent differences
– 102
– 476
–3
–6
18,657
0
– 99
– 48
– 2,746
1,462
Average tax rate
Taxes for prior years Effect of business combination Other Income tax income (+)/ expense (-) 1
comparative figures adjusted due to a change in the recognition of deferred tax assets from loss carry forwards
Tax loss carryforwards
Deferred transaction costs
Deferred tax assets recognised in other comprehensive income Measurement of an interest rate swap (effective portion)
Total deferred tax assets
Deferred tax liabilities 15,360
– 5,118
Measurement of loans using the effective interest method
910
– 910
differences between the carrying amounts in the consolidated
Measurement of an interest rate cap (ineffective portion)
394
– 394
financial statements and the tax base of individual assets and
Deferred transaction costs for refinancing
0
925
liabilities in 2014 and 2013 reflect the following data:
Deferred transaction costs for cash capital increase
0
429
16,664
– 5,068
491
– 491
Deferred tax assets and deferred tax liabilities from temporary
Measurement of investment properties
Total deferred tax liabilities
Deferred taxes recognised in equity Transaction costs for cash capital increase
Deferred tax expense Deferred taxes (net)
DO DEUTSCHE OFFICE AG
2014 ANNUAL REPORT
– 2,661 – 4,320
CONSOLIDATED FINANCIAL STATEMENTS FOR 2014 5. NOTES TO THE CONSOLIDATED STATEMENT OF INCOME
IN EUR K
CONSOLIDATED BALANCE SHEET 1
CONSOLIDATED STATEMENT OF INCOME 1
31 DEC. 2013
2013
reversals of deferred tax liabilities and future taxable profits in the light of minimum taxation rules in Germany. On the basis of projected taxable profits the Company has estimated deferred tax receivables from the expected utilisation of tax loss carryforwards amounting to EUR 9,012 k (prior year: EUR 6,298 k).
Deferred tax assets Tax loss carryforwards Measurement of an interest rate swap (ineffective portion) Measurement of an interest rate cap (ineffective portion) Deferred transaction costs
6,298
2,943
741
741
0
– 112
142
142
EUR 12,344 k (prior year: EUR 7,397 k) were offset against deferred tax liabilities of EUR 16,664 k (prior year: EUR 11,596 k), resulting overall in a deferred surplus of EUR 4,320 k (prior year: EUR 4,199 k). As of 31 December 2014, the Group has corporate income tax loss carryforwards amounting to EUR 186,098 k (prior year:
Deferred tax assets recognised in other comprehensive income Measurement of an interest rate swap (effective portion)
EUR 12,344 k (prior year: EUR 7,397 k) of deferred tax assets worth
EUR 168,482 k according to filed tax returns) and trade tax loss carryforwards of EUR 53,910 k (prior year: EUR 48,077 k accord216
0
7,397
3,714
10,242
– 1,057
Fair value measurement of interest-bearing loans to related parties
0
414
Measurement of loans using the effective interest method
0
185
accordingly, so that in the 2013 table the deferred tax assets from
Deferred transaction costs for refinancing
925
– 924
loss carryforwards were adjusted by EUR 4,199 k and the result-
Deferred transaction costs for cash capital increase
429
– 429
11,596
– 1,811
ing to filed tax returns). For corporate income tax loss carryforwards of EUR 129,150 k (prior year: EUR 128,685 k) no deferred tax
Total deferred tax assets
Deferred tax liabilities Measurement of investment properties
Total deferred tax assets
In 2014, the recognition of deferred tax assets from loss carryforwards takes into account the german minimum taxation rule, providing that the excess of deferred tax liabilities is an indication of recoverability. The comparative period was adjusted
Deferred tax income Deferred taxes (net)
assets have been recognised.
1,903 – 4,199
ing tax income by EUR 1,962 k. 5.9. EARNINGS PER SHARE To determine basic earnings per share, the net profit for the year attributable to holders of ordinary shares in the parent company is divided by the weighted number of ordinary shares outstanding during the year.
1
comparative figures adjusted due to a change in the recognition of deferred tax assets from loss carry forwards
Since there are no equity instruments with dilutive effect, diluted The Executive Board plays a decisive role in establishing the value
earnings per share are equal to basic earnings per share.
of deferred tax assets by assessing the extent to which deferred tax assets are likely to be realised. This will depend on the generation of future taxable profits during accounting periods when taxable temporary differences reverse and tax loss carryforwards can be deducted. Consideration will be given here to expected
DO DEUTSCHE OFFICE AG
2014 ANNUAL REPORT
95
96
CONSOLIDATED FINANCIAL STATEMENTS FOR 2014 6. NOTES TO THE CONSOLIDATED BALANCE SHEET
The table below shows the amounts used to calculate basic and
IN EUR K
2014
2013
diluted earnings per share: IN EUR K
2014
20131
1,299,410
1,398,268
Additions due to business combination
579,138
0
Disposals from sales
As at 1 January
– 18,689
– 13,589
Value-increasing investments during the year
20,359
10,846
Adjustment of rent smoothing due to application of SIC-15
– 1,146
38
Gains on measurement at fair value
32,097
18,678
Losses on measurement at fair value
– 37,709
– 44,681
Earnings per share (in EUR):
Reclassification to assets held for sale
– 92,800
– 70,150
Basic and diluted with reference to the net profit for the year attributable to holders of ordinary shares in the parent company
As at 31 December
1,780,660
1,299,410
Net profit for the year attributable to the holders of ordinary shares in the parent company (in EUR k)
Weighted average number of shares used to calculate basic earnings per share
1
124,919
172,067,410
1,013
82,000,000
0.73
0.01
comparative figures adjusted due to a change in the recognition of deferred tax assets from loss carry forwards. We refer to item 5.8. of the Notes to the Consolidated Financial Statements
The merger between PO REIT and the Company was entered
During the reporting year, the value of the portfolio, adjusted for disposals and for additions due to the business combination with PO REIT with effect from initial consolidation, increased by 1.50%.
in the Commercial Register at the Cologne District Court on 21 January 2014, along with equity increase by EUR 51,941,345 to
Upon change of control the properties acquired as a result of
EUR 133,941,345.
the merger with PO REIT were recognised at fair value. Apart from the property “Ludwig-Erhard-Anlage” in Frankfurt/Main,
On 14 February 2014, an increase in share capital to EUR 180,529,633
these values are equal to the fair values recorded by PO REIT as
as the result of a cash capital increase from the issue of
of 31 December 2013. The Executive Board concluded from their
46,588,288 new no-par-value bearer shares was entered in the
review at the time of initial consolidation that the value attrib-
Commercial Register at the Cologne District Court.
uted to the “Ludwig-Erhard-Anlage” property in Frankfurt/Main should be reduced to EUR 90,000 k, EUR 25,900 k less than the
The weighted number of shares was 172,067,410 as of 31 Decem-
fair value as of 31 December 2013.
ber 2014. In the previous reporting period, the assumption for the full year was that there would be 82,000,000.
The gains on measurement at fair value are mainly influenced by the generally lower interest level in Germany. The valuation of investment properties reflects this interest level as a signifi-
6. NOTES TO THE CONSOLIDATED BALANCE SHEET
cant input parameter through a reduced discount rate.
6.1. INVESTMENT PROPERTIES
In addition, a large number of properties have increased in value
Changes in investment properties primarily relate to the
following investments in upgrades, in particular in connection
category “Office” and are as follows:
with rental arrangements and to ensure relettability. The biggest individual project was the fit-out for the principal tenant in the property “Breitwiesenstrasse” in Stuttgart (previous year: implementation of a fire protection strategy for the property “Am Hauptbahnhof” in Frankfurt/Main.
DO DEUTSCHE OFFICE AG
2014 ANNUAL REPORT
CONSOLIDATED FINANCIAL STATEMENTS FOR 2014 6. NOTES TO THE CONSOLIDATED BALANCE SHEET
EUR 15,940 k of the losses on measurement at fair value relate to
impairment of the affected properties is a further driver of losses
two properties “Platz der Einheit 1” in Frankfurt as well as “Am
on measurement at fair value as the company owns 31 properties
Seestern” in Düsseldorf. This is due to delayed vacancy reduction
in Berlin, Bremen, Hessen and North Rhine-Westphalia.
as well as investments which have not yet been reflected by an During the previous year, the key contributing factors to losses
increase in value of these properties.
from measurement at fair value were the lower valuation for In addition, losses on measurement at fair value in the amount
the properties “Heerdter Lohweg” in Düsseldorf and “Platz
of EUR 13,438 k are influenced by the “Ludwig-Erhard-Anlage”
der Einheit” in Frankfurt/Main. The main reason for this were
property and the “Gutleutstrasse” property in Frankfurt, as well
vacancy rates, which were high in some cases at the time of
as the “Hohenzollernring” property in Cologne, which are clas-
measurement.
sified as assets held for sale and which are recognised at their sales prices less costs to sell. In this regard we refer to the notes
Like last year, all investment properties measured at fair value
in “6.5. Assets held for sale and associated liabilities”.
are classified as level 3 in the hierarchy of fair values.
Further losses on measurement at fair value are directly related
During the fiscal year, there were no reclassifications between
to the increase of transfer tax in Berlin, Bremen, Hessen and
measurements at fair value of levels 1, 2, and 3.
North Rhine-Westphalia. The fair value of the properties is measured by taking account the deduction of aqusition costs,
The table below sets out key assumptions used by the independ-
e. g. transfer tax. The increase of transfer tax and the resulting
ent expert to determine fair value with the aid of the discounted cash flow method:
CATEGORY
Office
FAIR VALUE AS AT 31 DEC. 2014 IN EUR K
1,630,360
FAIR VALUE AS AT 31 DEC. 2013 IN EUR K
31 DEC. 2014 SIGNIFICANT UNOBSERVABLE INPUT PARAMETERS
1,153,310 Average market rent qm/month in EUR
Logistics
32,200
RANGE
4.50 – 20.00
13.01
4.50 – 22.00
5.77
5.2 – 7.1
5.90
5.2 – 7.3
Discount rates in %
6.42
5.7 – 7.8
6.61
5.8 – 8.0
12.64
2.1 – 28.8
14.24
3.0 – 29.0
1.96
1.6 – 2.0
1.94
1.6 – 2.0
10.60
9.50 – 11.50
10.60
9.50 – 11.50
Capitalisation rates in %
5.92
5.7 – 6.3
6.16
6.0 – 6.4
Discount rates in %
6.50
6.2 – 6.9
6.85
6.7 – 7.0
Long-term vacancy rate in %
5.96
5.0 – 6.4
5.92
5.0 – 6.0
Inflation forecast and annual market rent growth in %
1.96
1.6 – 2.0
1.94
1.6 – 2.0
4.44
4.25 – 4.73
4.81
4.25 – 5.50
Capitalisation rates in %
6.85
6.8 – 7.0
6.94
6.9 – 7.0
Discount rates in %
7.54
7.5 – 7.6
7.54
7.5 – 7.6
12.64
10.0 – 16.5
18.12
16.0 – 20.0
1.96
1.6 – 2.0
1.94
1.6 – 2.0
113,600 Average market rent qm/month in EUR
32,500 Average market rent qm/month in EUR
Long-term vacancy rate in % Inflation forecast and annual market rent growth in % 1,780,660
RANGE
12.33
Inflation forecast and annual market rent growth in % 118,100
31 DEC. 2013 WEIGHTED AVERAGE
Capitalisation rates in %
Long-term vacancy rate in %
Nursing Home
WEIGHTED AVERAGE
1,299,410
DO DEUTSCHE OFFICE AG
2014 ANNUAL REPORT
97
98
CONSOLIDATED FINANCIAL STATEMENTS FOR 2014 6. NOTES TO THE CONSOLIDATED BALANCE SHEET
All the properties are located in Germany. The average for all
• Discount rate
significant unobservable input parameters has been weighted
• Long-term vacancy rate
on the basis of real estate market values as at 31 December. The
• Inflation forecast and annual market rent growth
range of the average long-term vacancy rate was calculated over a period of ten years.
A significant increase in the average market rent (EUR/qm/ month) and the inflation forecast or market rent growth assum-
The “office” category includes a small proportion of spaces let
ing consistency for the other input parameters leads to signifi-
to retailers and hotels. The weighted average market rent for
cantly higher fair values for the properties. A significant increase
retail is EUR 16.60 qm/month (prior year: EUR 19.16 qm/month),
in the vacancy rate and the discount and capitalisation rates,
and for the hospitality sector EUR 11.57 qm/month (prior year:
however, leads to a significantly lower fair value assuming con-
EUR 12.53 qm/month).
sistency for other input factors.
SENSITIVITY ANALYSIS TO SIGNIFICANT CHANGES
SENSITIVITY ANALYSIS TO CHANGES IN THE DISCOUNT AND
IN THE UNOBSERVABLE INPUT PARAMETERS OF
CAPITALISATION RATES APPLIED
HIERARCHY LEVEL 3
If the discount and capitalisation rates underlying the property
Key unobservable input parameters at hierarchy level 3 to deter-
valuation were to increase or decrease by 0.25 percentage points
mine the fair value of investment properties are:
each, the following values would result at the reporting date:
• Average market rent in EUR/qm/month • Capitalisation rate IN EUR K
Investment properties
IN EUR K
Investment properties
BOOK VALUE
VALUE IF DISCOUNT AND CAPITALISATION RATE INCREASE BY 0.25 PERCENTAGE POINTS
CHANGE
1,780,660
1,702,510
– 78,150
BOOK VALUE
VALUE IF DISCOUNT AND CAPITALISATION RATE DECREASE BY 0.25 PERCENTAGE POINTS
CHANGE
1,780,660
1,865,350
84,690
The Group has entered into commercial property lease agreements on its investment property portfolio. The following receivables exist for future minimum lease payments on the basis of non-cancellable operating leases: IN EUR K
DO DEUTSCHE OFFICE AG
2014 ANNUAL REPORT
2014
2013
Up to 1 year
106,584
82,969
1 to 5 years
268,509
239,415
Over 5 years
129,231
91,402
Total
504,324
413,786
CONSOLIDATED FINANCIAL STATEMENTS FOR 2014 6. NOTES TO THE CONSOLIDATED BALANCE SHEET
6.2. TRADE RECEIVABLES
As at 31 December 2014, value adjustment applied to trade receiv-
Trade receivables are as follows:
ables with a nominal value of EUR 1,550 k (prior year: EUR 238 k). Value adjustments have developed as follows:
IN EUR K
31 DEC. 2014
31 DEC. 2013 DEVELOPMENT OF VALUE ADJUSTMENTS
IN EUR K 10,013
7,870
Value adjustments
– 614
– 238
Total
9,399
7,632
Trade receivables
As at 31 December 2012
249
Utilisation
– 154
Release
– 95
When determining the value of trade receivables, all changes in
Addtions recognised as expenses
238
credit ratings prior to the reporting date are taken into account.
As at 31 December 2013
238
There is no significant concentration of credit risk due to the
Utilisation
– 98
broad nature of the customer/tenant base. Management accord-
Release
– 11
ingly takes the view that no further risk provision is required
Addtions recognised as expenses
485
beyond the recognised impairments.
As at 31 December 2014
614
As at 31 December, the aging structure of trade receivables is as follows:
IN EUR K
TOTAL
IMPAIRED RECEIVABLE
NEITHER PAST DUE NOR IMPAIRED
PAST DUE, BUT NOT IMPAIRED < 30 DAYS
30–60 DAYS
61–90 DAYS
>91 DAYS
31 Dec. 2013
7,870
238
4,308
2,321
232
70
701
31 Dec. 2014
10,013
1,550
6,523
1,134
127
156
523
The increase in receivables is primarily accounted for by receivables from purchase price retentions acquired from the merger with PO REIT (EUR 1,716 k). These are settled in step with the implementation of measures agreed under the purchase contract. The decrease in receivables less than 30 days overdue, for which no value allowance is required, is primarily due to different invoicing points for ancillary costs. In the majority of cases they were drawn up in the 3rd quarter of the reporting year and settled before the end of 2014, whereas in the previous year these ancillary costs were not invoiced until the 4th quarter and were still being examined by lessees at 31 December 2013.
DO DEUTSCHE OFFICE AG
2014 ANNUAL REPORT
99
100
CONSOLIDATED FINANCIAL STATEMENTS FOR 2014 6. NOTES TO THE CONSOLIDATED BALANCE SHEET
6.3. OTHER RECEIVABLES AND OTHER ASSETS
6.5. ASSETS HELD FOR SALE AND ASSOCIATED LIABILITIES
The other assets amounting to EUR 1,491 k (prior year: EUR 9,526 k)
IN EUR K
31 DEC. 2014
31 DEC. 2013
consist essentially of advance payments for a variety of administrative services totalling EUR 413 k (prior year: EUR 149 k) and claims for trade tax reimbursements totalling EUR 687 k (prior year: EUR 667 k).
92,800
70,150
Other assets
0
277
Liquid assets
0
14
92,800
70,441
Investment properties
Assets held for sale
In the previous year, other assets reported consisted essentially of deferred transaction costs for refinancing the acquisition loan
Interest-bearing loans
0
61,828
worth EUR 5,847 k and deferred costs for the capital increase
Other liabilities
0
266
implemented in 2014 worth EUR 2,708 k. During the reporting
Liabilities in connection with assets held for sale
0
62,094
year, the deferred costs of refinancing were deducted from the nominal amount of the loan on the date of disbursement by applying the effective interest method and will be amortised to
On the balance sheet as at 31 December 2014, the invest-
income over the term. The deferred costs for the capital increase
ment properties “Hohenzollernring” in Cologne (EUR 8,000 k),
were openly deducted from the capital reserve in the reporting
“Gutleutstrasse” (EUR 7,300 k) and “Ludwig-Erhard-Anlage”
year at the point in time when the capital increase occurred.
in Frankfurt (EUR 77,500 k) are reported as assets held for sale following purchase agreements notarised in November and
For further details about capital measures and refinancing
December 2014 and January 2015. The risks and rewards for the
please see the notes in “6.6. Equity” and “6.7. Interest-bearing
two properties in Frankfurt have not yet been transferred, and
loans”.
this is expected to occur in the second quarter of fiscal year 2015, whereas the property in Cologne was transferred to its
6.4. CASH AND CASH EQUIVALENTS
new owner on 1 February 2015.
This item consists of balances in current accounts totalling EUR 63,503 k (prior year: EUR 37,606 k).
The sale price agreed for the property “Ludwig-Erhard-Anlage” in Frankfurt was EUR 82,000 k. This will be reduced by EUR 3,500 k if
Balances amounting to EUR 14,786 k (prior year: EUR 15,891 k)
the purchaser settles the final instalment of the purchase price
constitute liquidity reserves in the form of loan agreements
due on 30 October 2015 prematurely on 30 April 2015. The Execu-
which the Company may only draw down with the consent of
tive Board considers it more likely that the purchaser will com-
the financing bank.
plete the settlement early and in full on 30 April 2015, and so the property is recognised as an asset held for sale at the reduced
An amount of EUR 5,853 k (prior year: EUR 3,865 k) for the next
purchase price which, after deduction of disposal costs amount-
interest and principal payment to the banks is included in cash
ing to approximately EUR 1,000 k, is EUR 77,500 k.
and cash equivalents. The recognised gain on the fair value valuation of the property in Likewise included here are the deposits received from lessees
Cologne after deduction of disposal costs recognised on classifi-
totalling EUR 2,565 k (prior year: EUR 2,421 k), which are held in
cation as an asset held for sale is EUR 305 k, while the two prop-
trust by the Group. The lease deposits recorded under cash and
erties in Frankfurt show a loss of EUR 13,743 k. These amounts
cash equivalents have corresponding liabilities which are recog-
are presented in Income Statement under gain/loss on meas-
nised in “Other liabilities”.
urement at fair value.
DO DEUTSCHE OFFICE AG
2014 ANNUAL REPORT
CONSOLIDATED FINANCIAL STATEMENTS FOR 2014 6. NOTES TO THE CONSOLIDATED BALANCE SHEET
For the properties “Gotenstrasse” in Hamburg (EUR 8,150 k) and
to no more than 90,264,816 new no-par-value bearer shares in
“Yorckstrasse” in Düsseldorf (EUR 62,000 k), which were recog-
return for payment in cash and/or kind (Authorised Capital 2014).
nised under that item on 31 December 2013 and sold by purchase
The Executive Board is furthermore empowered, under certain
agreements on 17 October 2013 and 12 December 2013 respec-
circumstances and with the approval of the Supervisory Board,
tively, the transfer of risk and reward occurred on 31 January 2014
to waive the pre-emptive rights of shareholders on one or more
and 1 January 2014 respectively. The property “Yorckstrasse” was
occasions, in full or in part, for up to 36,105,926 new no-par-value
sold under a share deal and the associated assets and liabilities
bearer shares. Entries relating to the cancellation and creation
were transferred to the purchaser.
of authorised capital and the amended Articles were filed in the Commercial Register on 7 July 2014.
6.6. EQUITY Further information about changes in equity will be found in the
CONTINGENT CAPITAL
Consolidated Statement of Changes in Equity.
Authorisation was created by resolution of the General Meeting on 23 September 2013 to conditionally increase the Com-
ISSUED CAPITAL
pany’s share capital by up to EUR 25,000,000 by issuing up to
The share capital as at 31 December 2014 is divided into
25,000,000 new no-par-value bearer shares (Contingent Cap-
180,529,633 no-par value bearer shares (prior year: 82,000,000).
ital 2013). This Conditional Capital 2013 serves to grant shares
The share capital is fully paid up.
to the holders or creditors of convertible bonds and bonds with warrants, which can be issued by the Company pursu-
The merger between PO REIT and the Company was entered
ant to the authorisation of the General Meeting on 23 Septem-
in the Commercial Register at the District Court of Cologne
ber 2013 until the close of 22 September 2018. The contingent
on 21 January 2014 along with the increase in share capital to
capital was entered in the Company’s Commercial Register on
EUR 133,941,345.
21 January 2014.
On 14 February 2014, an increase in share capital to EUR 180,529,633
CAPITAL RESERVE
as a result of a cash capital increase from the issue of 46,588,288
The year-on-year changes to the capital reserve are as follows:
new no-par-value bearer shares was entered in the Commercial Register at Cologne District Court. The cash capital increase was
IN EUR K
2014
2013
As at 1 January
287,432
226,375
Contribution from the business combination PO REIT
based on a price of EUR 2.80 per share. AUTHORISED CAPITAL In the light of the merger with PO REIT, the General Meeting on 23 September 2013 resolved an authorisation of capital (Authorised Capital 2013). Partial use of this was made in February 2014 for a cash capital increase.
114,219
0
Cash capital increase
83,859
0
Costs of capital increase less tax effects
– 2,613
0
Withdrawals for compensation of loss carried forward and net loss under German GAAP as well as distribution of a dividend
– 80,967
0
Withdrawals from company funds for the capital increase
0
– 81,920
empowered to increase the share capital by up to EUR 90,264,816
Contribution from the business combination German Acorn
0
182
in total until 19 May 2019, after obtaining the consent of the
Contributions of shareholders (Junior Loan)
0
135,078
Supervisory Board, by making one or more issues amounting
Reclassification from other reserves
Upon resolution by the General Meeting on 20 May 2014, the remainder of the authorised capital (Authorised Capital 2013) was cancelled in full. At the same time, the Executive Board was
As at 31 December
0
7,717
401,930
287,432
DO DEUTSCHE OFFICE AG
2014 ANNUAL REPORT
101
102
CONSOLIDATED FINANCIAL STATEMENTS FOR 2014 6. NOTES TO THE CONSOLIDATED BALANCE SHEET
On the day before its expiry the PO REIT share finished trading
MISCELLANEOUS RESERVES (CUMULATIVE EQUITY)
at a price of EUR 3.199 (XETRA closing price on 20 January 2014).
Year-on-year changes to the miscellaneous reserves are shown
The surplus value of the shares issued compared with the nom-
below:
inal amount, which is attributed to the merger with PO REIT on 21 January 2014, was transferred to the capital reserve
IN EUR K
2014
2013
– 1,150
– 20,363
Profit from cash flow hedges (not recognised in income)
– 14,314
20,208
Profit from cash flow hedges (recognised in income)
1,366
2,909
Changes due to deferred taxes
2,049
– 3,904
– 12,049
– 1,150
(EUR 114,219 k). As at 1 January
The cash capital increase on 14 February 2014 was effected at a price of EUR 2.80 per share. The surplus compared with the nominal amount of the shares issued was transferred to the capital reserve (EUR 83,859 k). The transaction costs for the cash capital increase consist essentially of transaction fees to the banking consortium.
As at 31 December
The withdrawals from the capital reserve to compensate for the
Miscellaneous reserves include gains and losses on the effective
loss carried forward as of 1 January 2014 and the net loss for 2014
portion of cash flow hedges. The cumulative gain or loss from
under German GAAP as well as the distribution of a dividend
the hedging transaction reported in the miscellaneous reserves
amount to EUR 80,967 k.
is transferred to the profit and loss account when the hedged transaction itself affects earnings.
In the previous year OCM Luxembourg JD Herkules Investments S.à r.l. transferred its loan receivables from subsidiaries and sub-
The portion of the loss from the retired instrument used to
subsidiaries of Prime Office (junior loan) to the shareholders
hedge the Homer acquisition loan that was reported under mis-
of the Company. On 26 November 2013, the Extraordinary Gen-
cellaneous reserves (cumulative equity) the previous year was
eral Meeting of the Company approved the contribution of the
reversed in full to profit and loss in the reporting year. We refer
loan from shareholders to the capital reserve of the Company
to our notes in “6.10. Financial instruments”.
in the amount of EUR 135,078 k. A corresponding loan transfer agreement was then signed between the shareholders of the
RETAINED EARNINGS
Company and the Company. Due to the loan waiver, the inter-
In 2014, the recognition of deferred tax assets from loss carryfor-
est accrued on the Junior Loan in the amount of EUR 7,928 k,
wards takes into account the German minimum taxation rule,
previously reported in “Other reserves”, was reclassified to the
providing that the excess of deferred tax liabilities is an indication
“Capital reserve”.
of recoverability. The comparative period was adjusted accordingly, so that in the comparison period the carryforward of retained earnings as at 31 December 2012 was adjusted by EUR 2,237 k and the value as at 31 December 2013 by EUR 4,199 k. The difference of EUR 1,962 k has been deducted from net profit for 2013.
DO DEUTSCHE OFFICE AG
2014 ANNUAL REPORT
CONSOLIDATED FINANCIAL STATEMENTS FOR 2014 6. NOTES TO THE CONSOLIDATED BALANCE SHEET
6.7. INTEREST-BEARING LOANS PORTFOLIO/PROPERTY
CURRENT
NON-CURRENT TOTAL, CURRENT AND NONCURRENT
MATURITY IN YEARS
EFFECTIVE INTEREST RATE P.A. 1
LOAN
DEFERRED INTEREST
TOTAL
Herkules refinancing loan
5.02
EURIBOR + 2.11%
16,666
1,424
18,090
382,904
400,994
Homer refinancing loan
3.75
EURIBOR + 2.00%
7,024
864
7,888
356,052
363,940
Düsseldorf, Stuttgart, Nuremberg 2
4.00
EURIBOR + 1.90%
1,023
0
1,023
53,187
54,210
Darmstadt, T-Online
84,271
IN EUR K
LOAN
31 December 2014
Prime Office Portfolio
2
4.92
EURIBOR + 1.80%
3,687
0
3,687
80,584
Darmstadt, T-Systems 2
5.00
EURIBOR + 1.80%
438
0
438
22,228
22,666
Essen, Alfredstrasse, 2
2.50
EURIBOR + 1.44%
932
0
932
42,065
42,997
3.00
EURIBOR + 1.65%
580
0
580
18,485
19,065 35,418
Essen, Opernplatz 2 Frankfurt, Ludwig-Erhard-Anlage
2
3.00
4.35%
35,418
0
35,418
0
Meerbusch 2
1.00
EURIBOR + 0.9%
9,745
0
9,745
0
9,745
Heilbronn 2
2.50
EURIBOR + 1.44%
372
0
372
16,774
17,146
Weighted average
4.23 75,885
2,288
78,173
972,279
1,050,452
Total
31 December 2013 Herkules acquisition loan
0.17
EURIBOR + 1.38%
471,538
6
471,544
0
471,544
Homer acquisition loan
0.17
EURIBOR + 2.00%
454,412
1,606
456,018
0
456,018
Weighted average
0.17 925,950
1,612
927,562
0
927,562
Total 1 2
3-month EURIBOR from business combination with PO REIT 21 January 2014
HEDGING RATE Apart from the financing for the property “Ludwig-ErhardAnlage” (0%) and for the Herkules portfolio (83%) and Homer portfolio (81%), all nominal amounts for loans are hedged 100% against the risk of rising interest rates by means of interest swaps or interest caps.
DO DEUTSCHE OFFICE AG
2014 ANNUAL REPORT
103
104
CONSOLIDATED FINANCIAL STATEMENTS FOR 2014 6. NOTES TO THE CONSOLIDATED BALANCE SHEET
REPAYMENT
HOMER REFINANCING LOAN
On 18 February 2014 the net proceeds from the cash capital
On 19 December 2013, an agreement worth EUR 370 million
increase amounting to EUR 128.6 million were paid out to the
was signed for the refinancing of the Homer acquisition loan.
Company. Of these proceeds, EUR 74.8 million were used to
The payment was drawn on 19 February 2014. The loan will run
repay the Homer acquisition loan and EUR 33.1 million to repay
until 30 September 2018. The loan is to be repaid in equal instal-
the Herkules acquisition loan. On 19 February 2014 the Homer
ments at 2% p. a. on an LTV equal to or greater than 55% and
acquisition loan along with the interest accrued was fully repaid
when the LTV falls below 55%, at 1.5% p. a. of the nominal amount.
out of freely available cash combined with an offset against the
An interest rate of 2% p. a. applies to interest periods that begin
new Homer refinancing loan of EUR 370 million. Similarly, the
with an LTV equal to or greater than 55%, and a rate of 1.9% p. a.
Herkules acquisition loan was fully paid off on 20 February 2014
when the LTV is less than 55%.
by offsetting the Herkules refinancing loan of EUR 425 million. The financial covenants for the Herkules refinancing loan comHERKULES REFINANCING LOAN
prise a Debt Service Cover Ratio (DSCR), a Loan to Value (LTV) and
On 18 December 2013, an agreement was signed for the refinanc-
a Gross Yield Ratio (GYR) as defined in the underlying agreement.
ing of the Herkules Acquisition Loan. The full Herkules Refinanc-
The GYR is measured at both Group and portfolio level.
ing Loan of EUR 425 million was drawn down on 20 February 2014. The Herkules Refinancing Loan has been granted in the form of
All financial covenants agreed with the financing bank had been
one tranche worth EUR 202 million, which will run until 18 Decem-
met at the reporting date.
ber 2018 (“tranche A”), and another tranche amounting to EUR 223 million (“tranche B”), which will expire on 18 December 2020. The
PRIME OFFICE PORTFOLIO LOANS
loan is to be repaid in equal instalments at 2.0% p. a. on a Loan to
The business combination with PO REIT, which took effect on
Value (LTV) equal to or greater than 55%, and when the LTV falls
21 January 2014, resulted in the transfer of secured loans with
below 55%, at 1.5% p. a. of the nominal amount. The margin of 1.9%
a fair value of EUR 330,413 k. All these loans are associated with
p. a. for tranche A applies to interest periods that begin with an LTV
specific properties and were concluded with different banks.
equal to or less than 65%, and a rate of 2.0% p. a. when the LTV is
The loans are secured by mortgages and other standard forms
greater than 65%. For tranche B, the margin of 2.3% p. a. applies to
of bank collateral.
interest periods that begin with an LTV equal to or less than 65%, and a rate of 2.4% p. a. when the LTV is greater than 65%.
Financing for the properties in Stuttgart/Nuremberg/Düsseldorf was rescheduled under a loan agreement of 21 March 2014 with
The financial covenants for the Herkules refinancing loan com-
an expiry date of 31 December 2018. Refinancing took place on
prise a Debt Service Cover Ratio (DSCR), a Loan to Value (LTV) and
31 March 2014. The loan is to be repaid in equal instalments at
a Gross Yield Ratio (GYR) as defined in the underlying agreement.
2% p. a. on an LTV equal to or greater than 55%, and when the LTV
The GYR is measured at Group level.
falls below 55%, at 1.5% p. a. of the nominal amount.
All financial covenants agreed with the financing bank had been
The credit terms fixed for the loan of EUR 35.4 million for the “Lud-
met at the reporting date.
wig-Erhard-Anlage” in Frankfurt/Main will be due on 30 April 2015. As at balance sheet date, this loan was classified as current liabilities since the purchase agreement was signed on 29 January 2015, and it is expected that the loan will be repaid in full on 30 April 2015. The term of the loan runs to 31 December 2017.
DO DEUTSCHE OFFICE AG
2014 ANNUAL REPORT
CONSOLIDATED FINANCIAL STATEMENTS FOR 2014 6. NOTES TO THE CONSOLIDATED BALANCE SHEET
Financing for the properties in Darmstadt was extended, with
The significant increase in payables for structural improvements
effect from 1 July 2014, until 30 November and 31 December
to properties reflects the pronounced year-on-year increase in
2019, respectively, including unscheduled repayments of approx.
investment volume. This is essentially a consequence of the busi-
EUR 5.94 million. The loans are to be repaid in equal instalments
ness combination with PO REIT and the structural improvements
of EUR 426 k and EUR 115 k, respectively. For the loan which will
related to these properties which have not yet been finished.
run until 30 November 2019, unscheduled repayments totalling EUR 6 million are to be made over a period of three years on
6.9. OTHER LIABILITIES
30 June, beginning in 2015.
IN EUR K
All financial covenants agreed with the financing banks had been met at the reporting date. 6.8. TRADE PAYABLES IN EUR K
31 DEC. 2014
31 DEC. 2013
Trade Payables
2014
2013
14,667
0
Deposits received
2,584
2,493
Prepaid rents
2,517
1,188
Personnel liabilities
1,495
649
Securities retained
980
968
VAT liabilities
919
779
Other
603
274
23,765
6,351
Property transfer tax
Total
for structural improvements
4,614
1,601
for property management
4,277
4,455
for surplus advance payments on service charges
2,661
2,207
The real estate transfer tax of EUR 23 million in connection with
534
1,034
the PO REIT merger has so far been paid in full for one property
0
13,482
for sale of properties for costs of refinancing, mergers, capital increase Other Total
2,524
706
14,610
23,485
and in the form of instalments for another four. The increase in HR liabilities is essentially due to the rise in headcount, partly as a result of the merger with PO REIT, and consists for the most part of liabilities resulting from variable com-
The decrease in trade payables is directly associated with the
ponents of pay that are not disbursed until the following year.
settlement of the transaction costs incurred in the previous year for the merger with PO REIT subsequent cash capital increase as
The increase in miscellaneous other liabilities is essentially the
well as the costs for refinancing the acquisition loans.
result of the initial recognition of EUR 443 k for future financial liabilities arising from the closure of office premises in Munich. We refer to the notes in “5.3. Administrative expenses”.
DO DEUTSCHE OFFICE AG
2014 ANNUAL REPORT
105
106
CONSOLIDATED FINANCIAL STATEMENTS FOR 2014 6. NOTES TO THE CONSOLIDATED BALANCE SHEET
6.10. FINANCIAL INSTRUMENTS The risk management system applied by the Deutsche Office Group to credit risk, liquidity risk and the various market risks (interest risks and other price risks) is described along with its objectives, methods and processes in the risk report which forms part of the Combined Management Report. CATEGORIES OF FINANCIAL INSTRUMENTS The following categories of financial assets and liabilities applied at 31 December 2014:
LOANS, RECEIVABLES AND OTHER FINANCIAL LIABILITIES AT AMORTISED COST
FAIR VALUE – OTHER INCOME
Derivative financial instruments, non-current portion
0
Total non-current
0
IN EUR K
FAIR VALUE – RECOGNISED THROUGH PROFIT OR LOSS
NON-FINANCIAL ASSETS AND LIABILITIES
0
2,002
0
2,002
0
2,002
0
2,002
TOTAL
Financial assets
Derivative financial instruments, current portion
0
0
493
0
493
Trade receivables and other receivables
10,555
0
0
413
10,968
Total current
10,555
0
493
413
11,461
Total financial assets
10,555
0
2,495
413
13,463
972,279
0
0
0
972,279
Financial liabilities Interest-bearing loans, non-current portion Derivative financial instruments, non-current portion Total non-current Interest-bearing loans, current portion Derivative financial instruments, current portion Trade payables and other liabilities Total current Total financial liabilities
0
11,566
30,655
0
42,221
972,279
11,566
30,655
0
1,014,500
78,173
0
0
0
78,173
0
2,748
9,405
0
12,153
36,608
0
0
2,517
39,125
114,781
2,748
9,405
2,517
129,451
1,087,060
14,314
40,060
2,517
1,143,951
Financial instruments assigned to the column “Fair value – other income” are interest hedging transactions classified as hedge accounting
DO DEUTSCHE OFFICE AG
2014 ANNUAL REPORT
CONSOLIDATED FINANCIAL STATEMENTS FOR 2014 6. NOTES TO THE CONSOLIDATED BALANCE SHEET
At 31 December 2013:
IN EUR K
LOANS, RECEIVABLES AND OTHER FINANCIAL LIABILITIES AT AMORTISED COST
FAIR VALUE – OTHER INCOME
NON-FINANCIAL ASSETS AND LIABILITIES
TOTAL
Financial assets Trade receivables and other receivables
8,475
0
8,704
17,179
Total financial assets, current
8,475
0
8,704
17,179
Financial liabilities Interest-bearing loans, current portion Derivative financial instruments Trade payables and other liabilities
927,562
0
0
927,562
0
6,046
0
6,046
29,406
0
1,189
30,595
Total current
956,968
6,046
1,189
964,203
Total financial liabilities
956,968
6,046
1,189
964,203
At the reporting date, there were no significant concentrations
As in the previous year, the book values of all financial instru-
of default risk for loans and receivables (financial assets) des-
ments recognised at amortised cost provide an approximation
ignated as measured at fair value and recognised in income.
of the fair value.
The book value shown above reflects the maximum default risk for the Group in relation to loans and receivables of this nature.
Due to the short-term nature of cash and cash equivalents, trade receivables, other receivables, trade accounts payable and other
FAIR VALUE OF FINANCIAL INSTRUMENTS RECOGNISED IN
liabilities, in the opinion of the Company management the book
THE GROUP
values of these financial assets and liabilities correspond to the
The fair value of derivatives held by the Company is regularly
fair value as at 31 December 2014.
determined by an independent expert using a simplified Discounted Cash Flow model. For the measurement of fair value,
As in the previous year, interest-bearing loans of EUR 1,050,452 k
both the credit risk of the counterparty and the credit risk of the
(prior year: EUR 927,562 k) and derivative financial instruments
reporting entity are taken into account. The value adjustment to
amounting to EUR 54,374 k (prior year: EUR 6,046 k) are classified
the fair value measurement of a derivative financial instrument
as level 2 in the fair value hierarchy.
in relation to the credit risk of the counterparty is referred to as the Credit Value Adjustment (CVA), and the value adjustment to
There were no reclassifications between levels 1, 2 and 3 of the
a derivative financial instrument relating to the credit risk of the
fair value measurements during the reporting year.
reporting entity is known as the Debt Value Adjustment (DVA). HEDGING THE FAIR VALUE OF FLOATING RATE LOANS To hedge rising interest rates, the Group uses derivative financial instruments such as interest rate swaps and caps for loans with variable interest rates.
DO DEUTSCHE OFFICE AG
2014 ANNUAL REPORT
107
108
CONSOLIDATED FINANCIAL STATEMENTS FOR 2014 6. NOTES TO THE CONSOLIDATED BALANCE SHEET
In an interest rate swap, the Group exchanges fixed and varia-
INTEREST RATE HEDGES FOR HOMER REFINANCING
ble interest payments calculated on the basis of agreed nomi-
On 19 February 2014, two interest-rate swaps were concluded for
nal amounts. These agreements allow the Group to mitigate the
the Homer refinancing loan. As part of each transaction, an addi-
risk of changing interest rates on the fair value of issued fixed-
tional payment of EUR 1,865 k was agreed by the banks; these
rate debt instruments and the cash flow risks associated with
amounts were paid out to the Company on 28 February 2014.
issued floating-rate debt instruments. The fair value of interest
The total amount was used to finance the redemption amount
rate swaps at the reporting date is determined by discounting
of the original swap cited above. The term of each of the two
future cash flows using the yield curves at the reporting date
swaps will end on 30 September 2018.
and the credit risk associated with the contracts. This is reproduced below. The average interest rate is based on outstanding
In addition, two interest caps were concluded for the Homer refi-
balances at the end of the financial year.
nancing loan on the same day. The Company paid a one-off fixed premium of EUR 1,175 k for each cap. The term of each of the two
The interest rate swaps are settled on a monthly or quarterly
interest caps will end on 30 September 2018.
basis. The floating rate on the interest rate swaps is the EURIBOR and/or the local interbank rate. The Group compensates for
As of 31 December 2014, the fair values of the interest-rate
the net difference between fixed and variable interest rates or
hedges for the Homer financing were as follows:
receives a compensation payment from the bank. INTEREST RELATED CONTRACTS
All interest rate swaps that exchange variable interest amounts for fixed rate interest amounts are designated as cash flow
IN EUR K
FIXED RATE/ CAPRATE P.A.
NOMINAL VALUE
FAIR VALUE
– 6,442
hedges to reduce the cash flow exposures of the Group incurred from floating-rate borrowings. The interest rate swap and interest payments on loans occur simultaneously and the value set in the equity amount is recognised in income over the term during which variable interest payments on the debt affect the statement of profit and loss.
Swaps
1.6575%
117,000
Caps
1.2500%
177,016
Total negative fair value Total positive fair value Total nominal value
7 – 6,442 7
294,016
In fiscal year 2014, the following significant changes occurred
The interest rate hedges for the Homer financing were not clas-
with regard to derivative financial instruments:
sifiable as effective throughout the entire accounting period for which the hedge was defined. The losses from changes to
REVERSAL OF INTEREST RATE HEDGES
fair value were therefore reversed directly through profit and
The interest rate swap with a nominal amount of EUR 163,727 k,
loss. The expenses amounting to EUR 5,261 k were recognised
which was concluded to hedge against the interest rate risk aris-
in finance expenses.
ing from the Homer acquisition loan and whose term would have extended until 30 November 2014, was fully reversed on
INTEREST RATE HEDGES FOR HERKULES REFINANCING
19 February 2014. The portion of the loss from the former hedg-
Three swaps were concluded on 20 February 2014 for the
ing instrument included in Other Reserves (accumulated equity)
Herkules refinancing loan. The term of two of these three
was fully recognised through profit or loss (EUR 1,366 k).
swaps will end on 18 December 2018, and one swap will run until 18 December 2020.
DO DEUTSCHE OFFICE AG
2014 ANNUAL REPORT
CONSOLIDATED FINANCIAL STATEMENTS FOR 2014 6. NOTES TO THE CONSOLIDATED BALANCE SHEET
As of 31 December 2014, the fair values were as follows:
The hedges for the Herkules financing met the criteria for hedge accounting and were effective throughout the reporting period. The loss from hedge instruments amounting to EUR 14,314 k is rec-
INTEREST RELATED CONTRACTS FIXED RATE/ CAPRATE P.A.
NOMINAL VALUE
FAIR VALUE
Swaps
0.9375%
159,176
– 4,596
Swap
1.3280%
175,724
IN EUR K
ognised as other income in the cash flow hedge reserve. INTEREST RATE HEDGING FOR THE PRIME OFFICE PORTFOLIO
Total negative fair value Total nominal value
– 9,718 – 14,314
The hedging transactions for the Prime Office portfolio loan displayed the following fair values at 31 December 2014:
334,900
31 DEC. 2014
INTEREST RELATED CONTRACTS FIXED RATE/CAPRATE P.A. AS AT 31 DEC. 2014
NOMINAL VALUE
FAIR VALUE
3.7700%
84,348
– 13,104
4.2000%
9,752
– 399
3.1200%
19,099
– 1,616
Swap
2.8600%
30,122
– 2,000
Cap
2.8600%
12,910
0
5.2000%
22,770
– 5,228
3.0250%
19,851
– 2,537
3.0250%
7,110
– 908
Swap
2.8600%
12,012
– 797
Cap
2.8600%
5,148
0
Swap to Swap (Payer Swap)
4.6900%
17,517
– 3,659
Swap to Swap (Receiver Swap)
1.7400%
17,517
2,488
2.9175%
27,302
– 3,370
IN EUR K
Property Darmstadt (T-Online-Allee) Swap Meerbusch (Earl-Bakken-Platz) Swap Essen (Opernplatz ) Swap Essen (Alfredstrasse)
Darmstadt (Deutsche Telekom-Allee) Swap Stuttgart (Breitwiesenstrasse) Swap Nuremberg (Richard-Wagner-Platz) Swap Heilbronn (Bahnhofstrasse)
Düsseldorf (Am Seestern) Swap Total positive fair value
2,488
Total negative fair value Total nominal value
– 33,618 285,458
DO DEUTSCHE OFFICE AG
2014 ANNUAL REPORT
109
110
CONSOLIDATED FINANCIAL STATEMENTS FOR 2014 6. NOTES TO THE CONSOLIDATED BALANCE SHEET
All hedge transactions from the merger with PO REIT were rated
The swap used to hedge the loan for financing the “Deutsche
ineffective throughout the accounting period defined for the
Telekom-Allee” property in Darmstadt was adjusted as of
hedge as from the date of the business combination. The gains
30 June 2014 insofar as the variable interest rate was converted
from changes to fair value were therefore directly reversed
from 1-month EURIBOR to 3-month EURIBOR. The swap’s nominal
through profit and loss. The income of EUR 832 k reduced finance
amount and its repayment structure were modified to match
expenses accordingly.
the terms of the loan. These changes led to additional cost for the Company, as reflected inter alia by a fixed interest rate that
When it refinanced the Stuttgart/Nuremberg/Düsseldorf prop-
was 0.39 percentage points higher than the original interest rate
erties, the Company reduced the fixed interest rates of the exist-
hedge. In addition, a one-off payment of EUR 216 k was agreed
ing and continuing swaps used to hedge the current loans by
with the swap counterparty, which was made in July 2014.
1.6325 and 1.66 percentage points, effective as of 31 March 2014, against one-off payments to the swap counterparty totalling
INTEREST RATE RISK
EUR 5,000 k.
The interest rate on floating rate financial instruments is adjusted at intervals of less than one year. Financial instruments
The receiver and payer swap used to hedge the financing of
that are hedged are not subject to an economic interest rate risk.
the “Alfredstrasse” property in Essen was redeemed for a total amount of EUR 3,773 k, effective as of 27 June 2014. The redemp-
The sensitivity analyses presented below are based on the expo-
tion amount was paid in July 2014.
sure to interest rate risk of derivative and non-derivative instruments at the reporting date. For floating rate liabilities, the
Following the extension of the loans for the two properties in
analysis is prepared on the assumption that the amount of the
Darmstadt, the associated interest rate hedges were adjusted
outstanding liability at the reporting date was outstanding for
with effect from 30 June 2014.
the whole year.
In this context, the two swaps used to hedge two tranches of
Internal reporting to governing bodies with regard to interest
the loan for financing the “T-Online-Allee” property in Darm-
rate risk assumes a rise or fall in the rate of 50 and 100 base
stadt were replaced by a new interest rate hedge. Compared
points. This reflects the Executive Board’s view of a reasonable
to its predecessors, the term of the swap was extended by one
potential change in the rates.
year, so that it matches the loan’s due date. The swap’s nominal amount and its repayment structure also match the loan.
If interest rates had been 50/100 basis points higher/lower and
The fixed interest rates of the two swaps were thus reduced by
all other variables had remained constant, the net income and
0.56 and 0.41 percentage points, respectively, to 3.77%, effective
shareholders’ equity of the Group as at 31 December 2014 (and
as of 30 June 2014.
31 December 2013) would rise/fall as follows:
DO DEUTSCHE OFFICE AG
2014 ANNUAL REPORT
CONSOLIDATED FINANCIAL STATEMENTS FOR 2014 6. NOTES TO THE CONSOLIDATED BALANCE SHEET
31 DEC. 2014
31 DEC. 2013
DIFFERENCE (BASE POINTS)
INTEREST INSTRUMENTS (IN EUR K)
EQUITY (IN EUR K)
3m EURIBOR
– 100
– 30,035
3m EURIBOR
– 50
– 14,829
3m EURIBOR
+ 50
3m EURIBOR
+ 100
INTEREST
NET PROFIT (IN EUR K)
INTEREST INSTRUMENTS (IN EUR K)
EQUITY (IN EUR K)
NET PROFIT (IN EUR K)
– 30,035
– 13,923
– 379
– 379
– 379
– 14,829
– 6,883
– 379
– 379
– 379
14,754
14,754
7,021
635
635
635
30,017
30,017
14,757
1,265
1,265
1,265
The year-on-year increase in sensitivity is associated with the
LIQUIDITY RISK
increased stock of derivative financial instruments. New hedg-
The Group monitors its risk of a potential shortage of funds
ing transactions have been initiated and acquired in connec-
using a periodic liquidity planning tool.
tion with refinancing the acquisition loan and the merger with PO REIT. In the previous year, an interest rate swap was effected
The Group’s objective is to maintain a balance between continu-
to hedge against the exposure to changing interest rates as a
ity of funding and ensuring flexibility through the use of cash
result of the Homer acquisition loan.
and cash equivalents and interest-bearing loans. The Group’s financial liabilities have the maturities shown below. The information is based on the contractual undiscounted payments:
31 DEC. 2014 IN EUR K
UP TO 2015
UP TO 2016
UP TO 2017
UP TO 2018
UP TO 2019
FROM 2020
TOTAL
Interest-bearing loans
98,762
43,988
117,533
594,290
104,015
192,955
1,151,543
Trade payables and other liabilities
36,608
0
0
0
0
0
36,608
Derivative financial Instruments
14,298
13,313
11,618
9,042
6,134
651
55,056
UP TO 2014
UP TO 2015
UP TO 2016
UP TO 2017
UP TO 2018
FROM 2019
TOTAL
927,562
0
0
0
0
0
927,562
29,406
0
0
0
0
0
29,406
6,046
0
0
0
0
0
6,046
31 DEC. 2013 IN EUR K
Interest-bearing loans Trade payables and other liabilities Derivative financial instruments
CREDIT RISK According to the Executive Board’s assessment of the credit ratings of Group tenants, there are no significant concentrations of credit risk.
DO DEUTSCHE OFFICE AG
2014 ANNUAL REPORT
111
112
CONSOLIDATED FINANCIAL STATEMENTS FOR 2014 7. OTHER NOTES
7. OTHER NOTES
7.4. RELATED PARTY DISCLOSURES At the Group reporting date, fund companies with a direct
7.1. OTHER FINANCIAL OBLIGATIONS
involvement held more than 50% (prior year: 100%) of shares in
Obligations amount to EUR 4,723 k (prior year: EUR 2,403 k) from
the Company capital. All of them are private equity funds man-
contracts already awarded for initiated or planned investment
aged by Oaktree Capital. A number of different investors have a
projects or from contractual agreements with tenants and other
role as limited partners in each of these funds. In keeping with
business partners.
the business model of private equity funds, these are passive investors who exert no active influence on the investment poli-
The Group has entered into framework agreements with sev-
cies of these funds or on the policies of the operating entities in
eral external property managers for the management of the real
the fund structure. Via the respective general partner, the funds,
estate portfolio. The agreement provides for annual payments
via several intermediate companies, are ultimately all controlled
of variable remuneration. The agreements currently have fixed
by Oaktree Capital Group Holdings GP, LLC, of Los Angeles, Cali-
terms until 31 December 2015 (prior year: 31 December 2014) and
fornia, USA. These companies thus have significant influence on
31 December 2017 (prior year: 31 December 2015). One agreement
the Company within the meaning of IAS 24.
stipulates special rights of termination in favour of the Group. The agreements are extended a year at a time if neither party has
Transactions with related entities resemble those occurring
given three or six months’ notice of termination.
under normal market conditions.
7.2. CONTINGENT ASSETS
Related parties are the Executive Board, the members of the
As in the previous year there were no contingent assets on the
Supervisory Board, and the managements of subsidiaries and
reporting date.
sub-subsidiaries as well as their close relatives. No transactions were entered into with any of these individuals.
7.3. CONSOLIDATED STATEMENT OF CASH FLOWS The Statement of Cash Flows shows how the cash and cash
7.5. HEADCOUNT
equivalents (see “6.4. Cash and Cash Equivalents”) held by the
In the reporting year 2014, the Company and hence the Group
Group changed during the reporting year due to inflows and
retained an average of 37 employees. 27 employment contracts
outflows. In accordance with IAS 7 (Cash Flow Statement), a dis-
were transferred to the Company as a result of the business com-
tinction is made between cash flows from operating, investing
bination with German Acorn and seven contracts as a result of
and financing activities.
the business combination with PO REIT.
The cash and cash equivalents presented in the Statement of Cash Flows include all payment resources consisting of credit balances with banks. Out of these balances the Company holds an amount of EUR 17,351 k (prior year: EUR 18,311 k), which is restricted. The cash flows from investing and financing activities are calculated on a cash basis. Cash flow from operating activities is derived indirectly from consolidated earnings before taxes.
DO DEUTSCHE OFFICE AG
2014 ANNUAL REPORT
CONSOLIDATED FINANCIAL STATEMENTS FOR 2014 7. OTHER NOTES
7.6. THE EXECUTIVE BOARD
Acorn, where he was Managing Director. With effect from 1 October
When the merger with PO REIT took effect on 21 January 2014,
2013 Mr Overath’s employment contract with German Acorn was
Alexander von Cramm, Munich, was appointed to the Executive
replaced by another with the Company. The comparative data for
Board of the Company.
the previous year are therefore pro rata figures for three months.
As at 31 December 2014, the Executive Board of the Company
For a breakdown of components of remuneration paid to the
consisted of Jürgen Overath, Hennef, and Alexander von Cramm,
two members of the Executive Board, we refer to the detailed
Munich.
description in the Remuneration Report which forms part of the Combined Management Report.
The remuneration paid to the two members of the Executive Board during the reporting year totalled EUR 1,284 k (prior year:
7.7. THE SUPERVISORY BOARD
EUR 163 k for one member).
When the merger with PO REIT took effect on 21 January 2014, the Supervisory Board was expanded from three members to
Jürgen Overath was not employed by the Company until Sep-
six. During fiscal year 2014, the composition of the Supervisory
tember 2013 and until that point he received no remuneration
Board was as follows:
from the Company. His previous employment was with German
NAME
OCCUPATION
Hermann T. Dambach (Chairman from 22 January 2014)
Managing Director of Oaktree GmbH, Frankfurt/Main
Uwe E. Flach Management Consultant (Deputy Chairman from 22 January 2014)
MEMBERSHIPS ON SUPERVISORY BOARDS AND OTHER SUPERVISORY BODIES WITHIN THE MEANING OF SECTION 125 (1) SENTENCE 5 OF THE GERMAN STOCK CORPORATION ACT (AKTIENGESETZ, “AKTG”)
Deutsche Wohnen AG, Frankfurt/Main (Chairman of the Supervisory Board) DZ Bank, Frankfurt/Main (Member of the Advisory Board) GSW Immobilien AG, Berlin (Member of the Supervisory Board)
Nebil Senman
Co-Managing Partner of Griffin Real Estate Sp. z.o.o., Warschau, Poland
Edward P. Scharfenberg (from 22 January 2014)
Attorney at law
Prof. Dr Harald Wiedmann (from 22 January 2014)
Auditor, Attorney at law, tax consultant Pro SiebenSat1 Media AG, Unterföhring (Member of the Supervisory Board) Joh. Berenberg, Gossler & Co. KG, Hamburg (Chairman of the Board of Directors) Universal-Investment Gesellschaft mbH, Frankfurt/Main (Member of the Supervisory Board)
Caleb Kramer (from 20 May 2014)
Managing Director of Oaktree Capital Management L.P. and Oaktree Capital Group LLC, London
Prof. Dr h. c. Roland Berger (from 22 January to 5 May 2014)
Honorary Chairman of Roland Berger Strategy Consultants GmbH, Munich
WMP EuroCom AG, Berlin (Chairman of the Supervisory Board) Deutsche Oppenheim Family Office AG, Grasbrunn (formerly Wilhelm von Finck Deutsche Family Office AG) (Deputy chairman of the Supervisory Board) Fresenius SE & Co. KGaA, Bad Homburg (Member of the Supervisory Board, Chairman of the Audit Committee) Fresenius Management SE, Bad Homburg (Member of the Supervisory Board) Schuler AG, Goeppingen (Member of the Supervisory Board) GEOX S.p.A., Montebelluna, Italy (Director) RCS Mediagroup S.p.A., Milan, Italy (Vice Chairman of the Board of Directors) Rocket Internet AG, Berlin (Member of the Supervisory Board), from 1 September 2014
DO DEUTSCHE OFFICE AG
2014 ANNUAL REPORT
113
114
Consolidated Financial Statements for 2014 7. OTHER NOTES
For each full fiscal year of membership of the Supervisory Board,
Other confirmations essentially refer to reviews by the auditors
the members receive a fixed remuneration of EUR 20 k. The chair
of the quarterly and half-year reports for 2014. In the previous
of the Supervisory Board receives twice the amount and the dep-
year, other confirmations comprised the review of pro forma
uty chair of the Supervisory Board receives one and a half times
financial information, the review of the FFO estimate and the
the amount received by an ordinary member of the Supervisory
issue of a comfort letter in connection with the securities pro-
Board as fixed remuneration. If the indicator “Funds from Oper-
spectus approved on 20 January 2014.
ations (FFO)”, as reported in the audited Consolidated Financial Statements of the Company or, if the Company is under no obli-
Other services primarily refer to tax consultancy. Other services
gation to compile them, the audited financial statements of the
in the previous year consisted essentially in insurance expenses
Company pursuant to section 325 para. 2a of the German Com-
for the comfort letter and the cost of the financial and tax due
mercial Code (HGB), amount to at least EUR 75,000 k in a fiscal
diligence in connection with the merger with PO REIT.
year, this firm remuneration will be doubled from the beginning of the following fiscal year. If a member of the Supervisory Board
7.9. Events since the reporting date
only exercises the function for part of a fiscal year, this remuner-
The property “Ludwig-Erhard-Anlage” in Frankfurt/Main was sold
ation will be disbursed on a pro-rata basis.
under a purchase agreement dated 29 January 2015 for a price of EUR 82,000 k. If the purchase price is paid in full on 30 April
In fiscal year 2014 the members of the Supervisory Board received
2015, ahead of due date, the purchase price will be reduced to
remunerations in accordance with Article 14 of the Articles of Asso-
EUR 78,500 k. Risk and reward have not yet been transferred.
ciation amounting to altogether EUR 144 k. In addition, expenses totalling EUR 13 k were reimbursed.
On 1 February 2015 risk and reward were transferred for the property “Hohenzollernring” in Cologne, sold under a purchase
7.8. Information on expert fees / audit fees
agreement dated 21 November 2014.
In the reporting year, the Group incurred expenses from expert fees for property valuation, CBRE GmbH, Frankfurt/Main,
Cologne, 24 March 2015
amounting to EUR 224 k (prior year: EUR 47 k). The Executive Board At the Annual General Meeting on 20 May 2014, Ernst & Young GmbH Wirtschaftsprüfungsgesellschaft, S tuttgart, was elected as auditor for the individual and consolidated financial statements for fiscal year 2014. Expenses on auditors are listed below: in EUR k
Audit Other confirmations Other services
DO Deutsche Office AG 2014 Annual Report
2014
2013
296
217
56
874
46
1,115
398
2,206
Alexander von Cramm
Jürgen Overath
CONSOLIDATED FINANCIAL STATEMENTS FOR 2014
DO DEUTSCHE OFFICE AG
2014 ANNUAL REPORT
115
116
CONSOLIDATED FINANCIAL STATEMENTS FOR 2014 COMPANIES INCLUDED IN THE CONSOLIDATED FINANCIAL STATEMENTS PURSUANT TO SECTION 313 PARA. 2 HGB
COMPANIES INCLUDED IN THE CONSOLIDATED FINANCIAL STATEMENTS PURSUANT TO SECTION 313 PARA. 2 HGB The following companies with their registered offices in Cologne in which the Company directly or indirectly holds 100% of the shares are included in the consolidated financial statements of DO Deutsche Office AG (formerly: Prime Office AG): COMPANIES
COMPANIES
1
German Acorn PortfolioCo I GmbH
31
GA 13. Objekt 1019 Verwaltungs GmbH
2
GA PortfolioCo I Verwaltungs GmbH
32
GA 14. Objekt 1020 Verwaltungs GmbH
3
GA Regionen PortfolioCo I GmbH 1
33
GA 15. Objekt 1021 Verwaltungs GmbH
4
GA Objekt 2001 Beteiligungs GmbH
1
34
GA 17. Objekt 1024 Verwaltungs GmbH
5
GA Objekt 2003 Beteiligungs GmbH 1
35
GA 18. Objekt 1027 Verwaltungs GmbH
6
GA Objekt 2005 Beteiligungs GmbH 1
36
GA 19. Objekt 1028 Verwaltungs GmbH
7
GA Objekt 2007 Beteiligungs GmbH 1
37
GA 20. Objekt 1030 Verwaltungs GmbH
8
GA Objekt 2008 Beteiligungs GmbH 1
38
GA 21. Objekt 1034 Verwaltungs GmbH
9
GA Objekt 2009 Beteiligungs GmbH 1
39
GA 23. Objekt 1036 Verwaltungs GmbH
10
GA Objekt 2010 Beteiligungs GmbH 1
40
GA 24. Objekt 1037 Verwaltungs GmbH
11
GA Objekt 2011 Beteiligungs GmbH
1
41
GA 25. Objekt 1038 Verwaltungs GmbH
12
GA Objekt 2012 Beteiligungs GmbH 1
42
GA 26. Objekt 1039 Verwaltungs GmbH
13
GA Objekt 2001 Dortmund GmbH & Co. KG 2
43
GA 27. Objekt 1040 Verwaltungs GmbH
14
GA Objekt 2003 Ratingen GmbH & Co. KG 2
44
GA 28. Objekt 1042 Verwaltungs GmbH
15
GA Objekt 2005 Böblingen GmbH & Co. KG 2
45
GA 29. Objekt 1043 Verwaltungs GmbH
16
GA Objekt 2007 Köln GmbH & Co. KG 2
46
GA 32. Objekt 1046 Verwaltungs GmbH
17
GA Objekt 2008 Düsseldorf GmbH & Co KG 2
47
GA 34. Objekt 1048 Verwaltungs GmbH
18
GA Objekt 2009 Bonn GmbH & Co. KG 2
48
GA 35. Objekt 1049 Verwaltungs GmbH
19
GA Objekt 2010 München GmbH & Co. KG
2
49
GA 5. Objekt 1004 Beteiligungs GmbH 1
20
GA Objekt 2011 Frankfurt GmbH & Co. KG
2
50
GA 6. Objekt 1007 Beteiligungs GmbH 1
21
GA Objekt 2012 Berlin GmbH & Co. KG
51
GA 7. Objekt 1008 Beteiligungs GmbH 1
22
GA Fixtures and Facility Management PortfolioCo I GmbH
52
GA 8. Objekt 1011 Beteiligungs GmbH 1
23
German Acorn PortfolioCo II GmbH
53
GA 10. Objekt 1014 Beteiligungs GmbH 1
24
GA 5. Objekt 1004 Verwaltungs GmbH
54
GA 11. Objekt 1015 Beteiligungs GmbH 1
25
GA 6. Objekt 1007 Verwaltungs GmbH
55
GA 12. Objekt 1016 Beteiligungs GmbH 1
26
GA 7. Objekt 1008 Verwaltungs GmbH
56
GA 13. Objekt 1019 Beteiligungs GmbH 1
27
GA 8. Objekt 1011 Verwaltungs GmbH
57
GA 14. Objekt 1020 Beteiligungs GmbH 1
28
GA 10. Objekt 1014 Verwaltungs GmbH
58
GA 15. Objekt 1021 Beteiligungs GmbH 1
29
GA 11. Objekt 1015 Verwaltungs GmbH
59
GA 17. Objekt 1024 Beteiligungs GmbH 1
30
GA 12. Objekt 1016 Verwaltungs GmbH
60
GA 18. Objekt 1027 Beteiligungs GmbH 1
DO DEUTSCHE OFFICE AG
2014 ANNUAL REPORT
2
CONSOLIDATED FINANCIAL STATEMENTS FOR 2014 COMPANIES INCLUDED IN THE CONSOLIDATED FINANCIAL STATEMENTS PURSUANT TO SECTION 313 PARA. 2 HGB
COMPANIES
COMPANIES
61
GA 19. Objekt 1028 Beteiligungs GmbH 1
91
GA 25. Objekt 1038 Ratingen GmbH & Co. KG 2
62
GA 20. Objekt 1030 Beteiligungs GmbH 1
92
GA 26. Objekt 1039 Recklinghausen GmbH & Co. KG 2
63
GA 21. Objekt 1034 Beteiligungs GmbH 1
93
GA 27. Objekt 1040 Stuttgart GmbH & Co. KG 2
64
GA 23. Objekt 1036 Beteiligungs GmbH
1
94
GA 28. Objekt 1042 Trier GmbH & Co. KG 2
65
GA 24. Objekt 1037 Beteiligungs GmbH
1
95
GA 29. Objekt 1043 Weiterstadt GmbH & Co. KG 2
66
GA 25. Objekt 1038 Beteiligungs GmbH
1
96
GA 32. Objekt 1046 Frankfurt GmbH & Co. KG 2
67
GA 26. Objekt 1039 Beteiligungs GmbH
1
97
GA 34. Objekt 1048 Ismaning GmbH & Co. KG 2
68
GA 27. Objekt 1040 Beteiligungs GmbH 1
98
GA 35. Objekt 1049 Ismaning GmbH & Co. KG 2
69
GA 28. Objekt 1042 Beteiligungs GmbH 1
99
GA Region Nord GmbH 1
70
GA 29. Objekt 1043 Beteiligungs GmbH 1
100
GA Region Süd GmbH 1
71
GA 32. Objekt 1046 Beteiligungs GmbH 1
101
GA Region Mitte GmbH 1
72
GA 34. Objekt 1048 Beteiligungs GmbH
1
102
GA Region Leipzig GmbH 1
73
GA 35. Objekt 1049 Beteiligungs GmbH
1
103
GA Fixtures and Facility Management PortfolioCo II GmbH
74
GA 5. Objekt 1004 Bruchsal GmbH & Co. KG 2
75
GA 6. Objekt 1007 Darmstadt GmbH & Co. KG 2
76
GA 7. Objekt 1008 Dreieich GmbH & Co. KG 2
77
GA 8. Objekt 1011 Düsseldorf GmbH & Co. KG 2
78
GA 10. Objekt 1014 Erlangen GmbH & Co. KG 2
79
GA 11. Objekt 1015 Eschborn GmbH & Co. KG 2
80
GA 12. Objekt 1016 Eschborn GmbH & Co. KG 2
81
GA 13. Objekt 1019 Frankfurt GmbH & Co. KG 2
82
GA 14. Objekt 1020 Frankfurt GmbH & Co. KG 2
83
GA 15. Objekt 1021 Frankfurt GmbH & Co. KG 2
84
GA 17. Objekt 1024 Frankfurt GmbH & Co. KG 2
85
GA 18. Objekt 1027 Hamburg GmbH & Co. KG 2
86
GA 19. Objekt 1028 Kaiserslautern GmbH & Co. KG 2
87
GA 20. Objekt 1030 Köln GmbH & Co. KG 2
88
GA 21. Objekt 1034 Ludwigsburg GmbH & Co. KG 2
89
GA 23. Objekt 1036 Neuss GmbH & Co. KG 2
90
GA 24. Objekt 1037 Nürnberg GmbH & Co. KG 2
1 2
The company makes use of the relief provision of section 264 Para. 3 HGB. The company makes use of the exemption provision of section 264 b HGB.
DO DEUTSCHE OFFICE AG
2014 ANNUAL REPORT
117
118
AUDIT OPINION
AUDIT OPINION
We have audited the consolidated financial statements prepared
those entities included in consolidation, the determination of
by DO Deutsche Office AG (formerly: Prime Office AG), Cologne,
consolidated entities, the accounting and consolidation prin-
comprising the Consolidated Statement of Income, the Consol-
ciples used and significant estimates made by the legal repre-
idated Statement of Comprehensive Income, the Consolidated
sentatives, as well as evaluating the overall presentation of the
Statement of Financial Position, the Consolidated Statement of
consolidated financial statements and the group management
Cash flows, the Consolidated Statement of Changes in Equity,
report. We believe that our audit provides a reasonable basis
and the Notes, together with the management report for the
for our opinion.
Company and for the Group for the fiscal year from 1 January to 31 December 2014. The preparation of the consolidated financial
Our audit has not led to any reservations.
statements and the management report for the Company and for the Group in accordance with IFRS as adopted by the EU, and
In our opinion, based on the findings of our audit, the consoli-
the additional requirements of German commercial law pur-
dated financial statements comply with IFRS as adopted by the
suant to Sec. 315a Para. 1 HGB are the responsibility of the Com-
EU and the additional requirements of German commercial law
pany’s legal representatives. Our responsibility is to express an
pursuant to Sec. 315a Para. 1 HGB and give a true and fair view of
opinion on the consolidated financial statements and on the
the net assets, financial position and results of operations of the
management report for the Company and for the Group based
Group in accordance with these requirements. The management
on our audit.
report for the Company and for the Group is consistent with the consolidated financial statements and as a whole provides
We conducted our audit of the consolidated financial statements
a suitable view of the Group’s position and suitably presents the
in accordance with Sec. 317 HGB and German generally accepted
opportunities and risks of future development.
standards for the audit of financial statements promulgated by the Institut der Wirtschaftsprüfer [Institute of Public Auditors in Germany] (IDW). Those standards require that we plan and
Cologne, 24 March 2015
perform the audit such that misstatements materially affecting the presentation of the net assets, financial position and
Ernst & Young GmbH
results of operations in the consolidated financial statements
Wirtschaftsprüfungsgesellschaft
prepared in accordance with the applicable financial reporting regulations and in the group management report are detected with reasonable assurance. Knowledge of the business activities and the economic and legal environment of the Group
Völker
Galden
account in the determination of audit procedures. The effective-
Wirtschaftsprüfer
Wirtschaftsprüfer
ness of the accounting-related internal control system and the
[German Public Auditor]
[German Public Auditor]
and expectations as to possible misstatements are taken into
evidence supporting the disclosures in the consolidated financial statements and the group management report are examined primarily on a test basis within the framework of the audit. The audit includes assessing the annual financial statements of
DO DEUTSCHE OFFICE AG
2014 ANNUAL REPORT
Declaration of the legal Representatives
Declaration of the legal Representatives
“We hereby certify that, to the best of our knowledge and in accordance with the applicable rules on financial reporting, the Consolidated Financial Statements for the period ending 31 December 2014 give a true and fair view of the Group’s net assets, financial position and results of operations, and that the Group Management Report, which is combined with the Management Report of DO Deutsche Office AG, provides a true and fair view of the Group’s business performance including the Group’s results of operations and current status, and sets out the opportunities and risks associated with the Group’s expected development.”
Cologne, 24 March 2015
Alexander von Cramm
Jürgen Overath
DO Deutsche Office AG 2014 Annual Report
119
120
REPORT OF THE SUPERVISORY BOARD
REPORT OF THE SUPERVISORY BOARD
DEAR SHAREHOLDERS, LADIES AND GENTLEMEN, In the following report, the Supervisory Board of DO Deutsche
Association, of continually monitoring and advising the compa-
Office AG would like to inform you about its activities in the
ny’s management. The activities of the Executive Board did not
fiscal year 2014.
give rise to any objections. In accordance with Section 90(1) and (2) of the German Stock Corporation Act (AktG), the Executive Board
At the beginning of the year, the Supervisory Board’s activi-
fully and promptly informed the Supervisory Board on a regular
ties were focused on two transactions: the company’s merger
basis in oral and written reports about all the material issues of
with Prime Office REIT-AG, Munich, which was completed on
business planning and strategic development. No use was made
21 January 2014 when the merger was entered in the registry
of the Supervisory Board’s rights of inspection and audit under
of companies; and the capital increase, which was success-
Section 111(2) sentences 1 and 2 of the German Stock Corporation
fully implemented in this connection, yielding gross proceeds
Act (AktG) because no matters requiring clarification arose. When
of EUR 130.4 million. With this capital measure, Deutsche Office
the Supervisory Board’s approval was required for decisions and
improved its capital base and reduced its gearing (loan-to-value
measures of the Executive Board, the members of the Supervi-
ratio) initially to approx. 58 percent and later in the year to
sory Board carefully examined the proposals submitted by the
just below 55 percent following the early repayment of addi-
Executive Board and adopted resolutions on the basis of written
tional loans.
and oral information.
The integration of the merged companies was completed in
COMPOSITION OF THE SUPERVISORY BOARD
mid-2014 in Cologne, which was earlier than expected. Follow-
In accordance with Sections 95 and 96 in conjunction with the
ing the merger, the Executive Board proposed, with the Super-
Articles of Association, the company’s Supervisory Board con-
visory Board’s approval, that the company should be renamed
sists of six members.
Deutsche Office as an office property company focusing on German metropolitan regions and conurbations. This proposal was
The current members of the Supervisory Board are Mr Hermann
adopted at the Annual General Meeting on 20 May 2014, and
T. Dambach (Chairman), Mr Uwe E. Flach, Mr Caleb Kramer,
the new name was entered in the register of companies on
Mr Nebil Senman, Mr Edward P. Scharfenberg and Professor
7 July 2014.
Dr Harald Wiedmann.
Other key issues also discussed by the Supervisory Board in
On 4 April 2014, Professor Dr h. c. Roland Berger informed the
fiscal 2014 included the company’s operational performance
company that he would resign from the Supervisory Board,
within the context of the economic environment and the prop-
effective as of the end of 5 May 2014, i. e. within the statutory
erty market in Germany, fundamental issues concerning cor-
period of notice. The Nomination Committee suggested that
porate planning, the company’s strategic direction and its
Mr Caleb Kramer should be proposed as a candidate at the com-
financing.
pany’s Annual General Meeting to be elected as a member of the Supervisory Board for a period of two years as of the date of his
In the second half of 2014, the Supervisory Board dealt inten-
appointment. Mr Kramer was elected at the company’s Annual
sively with the sales process for the “Westend Ensemble”
General Meeting on 20 May 2014.
property in Frankfurt, which the Executive Board had initiated in August 2014 following the approval of the preliminary build-
MEETINGS OF THE SUPERVISORY BOARD AND ITS COMMITTEES
ing application by the City of Frankfurt.
In 2014, the Supervisory Board held seven ordinary meetings. In addition, a total of four resolutions were adopted in writing. No
ADVISING AND SUPERVISING THE MANAGEMENT
member of the Supervisory Board attended less than half of the
In fiscal year 2014, the Supervisory Board of Deutsche Office
Supervisory Board meetings. All the Supervisory Board members
performed its duties, as stipulated by law and the Articles of
participated in all the meetings and/or the resolutions adopted
DO DEUTSCHE OFFICE AG
2014 ANNUAL REPORT
REPORT OF THE SUPERVISORY BOARD
in writing; absent Supervisory Board members either attended
At its meeting on 20 May 2014, the Supervisory Board dealt with
the meetings by telephone or had asked another member of the
the company’s business performance since the beginning of the
Supervisory Board to transmit their vote. The Executive Board
year. The Executive Board presented a detailed report about the
attended all the Supervisory Board meetings and presented com-
company’s year-to-date performance in 2014. In addition, the
prehensive reports about the status of the company and its busi-
Executive Board informed the Supervisory Board about the pro-
ness performance. In its reports, the Executive Board informed
gress made and the current status of integration in the wake of
the Supervisory Board not only about the key performance indi-
the merger. Since the integration had nearly been completed,
cators but also about the company’s profitability and liquidity,
the Supervisory Board decided to dissolve the Merger Integration
specific developments in the property sector and with regard
Committee. After Mr Cramer’s election as a Supervisory Board
to specific properties held by the company, as well the internal
member by the Annual General Meeting, the Supervisory Board
control and risk management system. In addition, the Supervi-
appointed new members to its committees.
sory Board Chairman and the two Executive Board members, Mr Alexander von Cramm and Mr Jürgen Overath, held regular
At its meeting on 1 August 2014, the Supervisory Board concen-
detailed talks about the company’s recent business performance
trated on the financial report on the first half of 2014, the com-
and major business transactions.
pany’s operational performance and the development of the letting business. In addition, the Supervisory Board approved
At its meeting on 15 January 2014, the Supervisory Board dealt
various transactions requiring its approval under the Executive
with the refinancing of the Herkules and Homer loans.
Board’s Rules of Procedure, in particular the conclusion of rental contracts.
The meeting on 22 January 2014 was the constituent meeting of the Supervisory Board which had been enlarged to 6 mem-
At its meeting on 31 October 2014, the Supervisory Board dealt
bers after the entry into effect of the merger of Prime Office REIT-
with the company’s quarterly performance as of 30 September
AG with the company. At this meeting, the Supervisory Board
2014 and approved the conclusion of several rental contracts. In
elected, from its midst, Mr Hermann T. Dambach as Chairman
addition, the Supervisory Board discussed the status of various
of the Supervisory Board. Mr Uwe E. Flach was elected as Dep-
sales projects in depth, in particular the status of the structured
uty Chairman. Furthermore, the Supervisory Board appointed
sales process initiated with regard to the “Westend Ensemble”
the members of its various committees and adopted the Rules
property.
of Procedure for the Executive Board and the Supervisory Board. On 10 December 2014, the Supervisory Board dealt with the At its meeting on 25 March 2014, the Supervisory Board primar-
Executive Board’s status report and the budget plan submitted
ily discussed the Individual Financial Statements and the Con-
by the Executive Board, as well as risk management issues. In
solidated Financial Statements for the fiscal year 2013. At the
addition, the Supervisory Board discussed the appropriateness
meeting, the Supervisory Board approved the Individual Finan-
of the Executive Board’s compensation, in particular relative to
cial Statements as of 31 December 2013 and the Consolidated
the top management’s remuneration and the remuneration
Financial Statements as of 31 December 2013, which were thus
of the employees of Deutsche Office as a whole, defining rele-
adopted. In addition, the Supervisory Board adopted the res-
vant demarcation criteria and the development of the remuner-
olution on its report to the Annual General Meeting for the
ation over time. In addition, the Supervisory Board discussed, and
fiscal year 2013. The agenda for the Annual General Meeting on
adopted a resolution on, the Declaration of Compliance with the
20 May 2014, which had already been discussed at the meeting
Recommendations of the German Corporate Governance Code.
on 25 March 2014, was adopted on 25 April 2014 by means of a written resolution.
DO DEUTSCHE OFFICE AG
2014 ANNUAL REPORT
121
122
REPORT OF THE SUPERVISORY BOARD
In accordance with its current Rules of Procedure, the Supervi-
dealt with the reports presented on risk management and the
sory Board of Deutsche Office currently has the following com-
significant risks identified, as well as the review of the compli-
mittees: the Executive Committee, the Nomination Committee,
ance principles and corporate procedures, including the effec-
the Audit Committee and the Property and Financing Commit-
tiveness of the control system.
tee. Their purpose is to increase the efficiency of the Supervisory Board’s work and to deal with complex matters.
The Property and Financing Committee discusses with the Executive Board potential targets and conditions for the acquisi-
The Executive Committee coordinates the work in the Super-
tion or sale of real property or holdings, the company’s financing
visory Board and prepares the Supervisory Board’s meetings; it
structure as well as the objectives and terms for financing the
is composed of Hermann T. Dambach (Chairman), Uwe E. Flach
acquisition or sale of properties. In accordance with the Rules of
and Caleb Kramer. In 2014, the Executive Committee adopted
Procedure for the Executive Board, the Committee is involved in
a resolution to pay out the PSUs awarded to the former Prime
the approval of transactions for which the Executive Board needs
Office REIT-AG employees within the framework of their incen-
the Supervisory Board’s approval. The members of the Property
tive programme.
and Financing Committee are Hermann T. Dambach (Chairman), Nebil Senman and Edward Scharfenberg.
The Nomination Committee prepares the Supervisory Board’s personnel decisions, in particular with regard to the members
At its meeting on 21 November 2014, the Property and Financing
of the Executive Board. The Committee consists of Hermann T.
Committee mainly discussed the company’s various sales activi-
Dambach (Chairman), Uwe E. Flach and Caleb Kramer. In 2014,
ties. In addition, the Committee reviewed the broad lines of the
the Committee mainly dealt with the search for a successor to
business plan for 2015 to 2017 and, on this basis, discussed the
Professor Berger. At its meeting on 4 April 2014, the Nomination
strategy for potential acquisitions.
Committee decided to propose Mr Caleb Kramer as a candidate for election by the Annual General Meeting.
The special committees established in 2014 on the capital increase, on merger integration (this committee held a total
The Audit Committee prepares the Supervisory Board’s resolu-
of three meetings to review the status of integration of Prime
tions concerning the approval of the year-end financial state-
Office REIT-AG into the company and to discuss the next steps
ments and agreements with auditors; it discusses half-year
with the Executive Board) and on the company’s strategic direc-
and quarterly financial reports with the Executive Board prior
tion were dissolved at the end of the past fiscal year following
to their publication, analyses the company’s risk management
the completion of the projects for which the committees had
and advises the Supervisory Board with regard to the develop-
been established.
ment of the risk management system. The Audit Committee’s members are Professor Dr Harald Wiedmann (Chairman), Uwe
CORPORATE GOVERNANCE
E. Flach and Nebil Senman.
Responsible and value-based management also includes the implementation of the German Corporate Governance Code,
In 2014, the Audit Committee had four ordinary meetings and
which Deutsche Office has already largely implemented. In
adopted two resolutions in writing. At its meetings, the Audit
the wake of the admission of the shares of Deutsche Office
Committee discussed in depth and approved the company’s
for trading on the Frankfurt Stock Exchange in January 2014,
year-end financial statements for 2013 in the presence of the
the company issued the Declaration of Compliance required
auditor (meeting of 25 March 2014), the quarterly financial state-
under the German Corporate Governance Code for the first time
ments for Q1/2014 (meeting of 5 May 2014), the financial state-
in December 2014 and published it on the company website at
ments for the first half of 2014 (meeting of 1 August 2014) and
www.deutsche-office.de. The Declaration of Compliance is also
the nine-month financial statements as of 30 September 2014
available to shareholders on the company’s website.
(meeting of 31 October 2014). In addition, the Audit Committee
DO DEUTSCHE OFFICE AG
2014 ANNUAL REPORT
REPORT OF THE SUPERVISORY BOARD
There are no actual or potential conflicts of interest between
Supervisory Board endorsed the findings of the auditor who had
the duties of the members of the company’s Executive Board
issued an unqualified opinion. The Supervisory Board declared
and Supervisory Board and their private interests or other
that no objections were raised. The Supervisory Board agreed
obligations.
with the Executive Board’s appraisal in the Combined Management Report. The Supervisory Board approved the Annual Finan-
REVIEW OF THE 2014 ANNUAL AND CONSOLIDATED FINANCIAL
cial Statements, which were thus adopted under Section 172 of
STATEMENTS AND OF THE RELATED PARTIES REPORT
the German Stock Corporation Act (AktG). The Supervisory Board
With reference to the Executive Board’s Related Parties Report
also approved the Consolidated Financial Statements under
for fiscal year 2014 and the auditor’s report on this matter, the
Section 171(2) Sentences 4 and 5 Stock Corporation Act (AktG).
Supervisory Board put on record the following statement at its
At its meeting on 24 March 2015, the Supervisory Board adopted
meeting on 24 March 2015:
the Supervisory Board’s Report, the Corporate Governance Statement and the Remuneration Report in their present form.
“The Related Parties Report shows that, in the legal transactions performed with affiliated companies, Deutsche Office has
The Supervisory Board thanked the Executive Board and the
received reasonable consideration and has not been placed at a
employees of Deutsche Office for their great personal commit-
disadvantage. The Related Parties Report was reviewed by the
ment and for the work done in the past fiscal year.
auditor. The auditor issued the following audit opinion: “After duly auditing and assessing the Related Companies Report, we
Cologne, 24 March 2015
confirm that: 1. the factual statements in the report are correct, Hermann T. Dambach 2. the payments made by the company in the legal transactions
Chairman of the Supervisory Board
outlined in the report were not unreasonably high, 3. there is no reason to evaluate the measures mentioned in the report in any way other than as evaluated by the Executive Board.” Following its own review, the Supervisory Board concurs with the assessment made by the auditor and thus approves the Related Parties Report.” At its meeting on 24 March 2015, the Supervisory Board discussed the key figures of the Annual and Consolidated Financial Statements in the presence of representatives of the auditor. Prior to the meeting, the members of the Supervisory Board had received the Audit Committee’s report as well as a broad range of other documents, including the Combined Management Report, the Corporate Governance Statement, as well as the Remuneration Report. Following its own review of the Annual Financial Statements, the Consolidated Financial Statements and the Combined Management Report as of 31 December 2014, the
DO DEUTSCHE OFFICE AG
2014 ANNUAL REPORT
123
124
CORPORATE GOVERNANCE REPORT STATEMENT OF CORPORATE GOVERNANCE PURSUANT TO SECTION 289A GERMAN COMMERCIAL CODE
CORPORATE GOVERNANCE REPORT
STATEMENT OF CORPORATE GOVERNANCE PURSUANT TO SECTION 289A GERMAN COMMERCIAL CODE The Executive Board and the Supervisory Board of DO Deutsche
Corporate Governance Code (DCGK) by issuing its first Dec-
Office AG (“Deutsche Office”) work together closely in a spirit of
laration of Compliance. It has published this declaration on
trust to promote the interests of the Company; they are aware of
the website of DO Deutsche Office AG (“Deutsche Office”) at
their responsibility towards shareholders, tenants and employ-
www.deutsche-office.de and made it permanently available to
ees. The pursuit of good corporate governance unites all Com-
shareholders.
pany units, strengthening the confidence placed in the Company and in the controls it has in place, by investors, the capital market,
Deutsche Office currently complies with and will continue to
tenants and business partners, employees and the general pub-
comply with the recommendations of the DCGK in its most recent
lic. In consequence, Deutsche Office attaches importance, among
version dated 24 June 2014, with the following exceptions:
other things, to proactive, sustainable and transparent reporting and communications.
Unlike Recommendation 3.8 DCGK, at the time when shares were admitted for trading in January 2014 the terms and conditions of
GERMANY’S CORPORATE GOVERNANCE CODE AND
the D&O insurance policy for members of the Supervisory Board
DECLARATION OF COMPLIANCE PURSUANT TO SECTION 161
did not yet provide for a deductible. The deductible envisaged in
GERMAN STOCK CORPORATION ACT
DCGK has now been implemented.
Responsible, value-oriented governance also means implementing the German Corporate Governance Code (DCGK). The Com-
Unlike in Recommendation 4.2.1 DCGK, although the Executive
pany has been listed since 2014. After its shares were admitted
Board has more than one member, no spokesperson or chair
for trading on the Frankfurt Stock Exchange in fiscal year 2014,
has been designated. Rather, the two members of the Execu-
Deutsche Office complied with the requirements of the DCGK by
tive Board mutually complement and represent each other; in
issuing a Declaration of Compliance with the Code and publish-
keeping with their clearly defined functional responsibilities,
ing it on the Deutsche Office website at www.deutsche-office.de
they regularly consult with the Chairman of the Supervisory
“Investors/Corporate Governance/Declaration”. Deutsche Office
Board and inform him of developments of significant interest
has made this Declaration of Compliance permanently avail-
to Deutsche Office. Under these circumstances, the Executive
able to shareholders and will do the same with its declarations
Board and the Supervisory Board take the view that designat-
of compliance in future years.
ing a spokesperson or a chairman would not produce any benefits for the Company.
DECLARATION OF COMPLIANCE ADOPTED IN DECEMBER 2014 “Section 161 of the German Stock Corporation Act (AktG) requires
The members of the Executive Board and the Supervisory Board
the executive board and the supervisory board of a listed com-
of Deutsche Office will continue to observe statutory require-
pany to issue an annual declaration confirming that they have
ments when deciding personnel matters and will take account
complied with the recommendations drawn up by the Govern-
of the professional and personal qualifications of all candidates,
ment Commission on the German Corporate Governance Code
regardless of gender. In this regard, the Executive Board and the
and published by the Federal Ministry of Justice in the official sec-
Supervisory Board are mindful of diversity within their particular
tion of the Federal Gazette, and if not which recommendations
spheres of responsibility and seek to take appropriate account
they have not applied and for what reasons.
of women.
The Company has been listed since January 2014. Following the
Unlike Recommendation 5.4.1 paragraph 2 DCGK, the Supervisory
issue of shares for trading on the Frankfurt Stock exchange,
Board has not yet adopted any concrete objectives in this field.
the Company responded to the requirements of the German
The Supervisory Board takes the view that, given the modest size
DO DEUTSCHE OFFICE AG
2014 ANNUAL REPORT
CORPORATE GOVERNANCE REPORT STATEMENT OF CORPORATE GOVERNANCE PURSUANT TO SECTION 289A GERMAN COMMERCIAL CODE
of the Supervisory Board with its six members, the best possible
The merger, which was entered in the Commercial Register in
composition is not dependent on previously defining targets. The
January 2014, and the cash capital increase carried out in Feb-
appointment of women has been an aspiration since the IPO, and
ruary 2014 meant that, as a result of these projects, the annual
will continue to be so, to the extent that suitable female candi-
financial statements and the consolidated financial state-
dates are available.
ments were not completed until the end of March 2014. Hence, the annual financial statements and the consolidated finan-
The Company does not currently fully comply with Recommenda-
cial statements were not published until early April 2014. This
tion in 4.2.3 DCGK to cap the remuneration of the Executive Board
entailed a failure to comply with Recommendation 7.1.2 DCGK,
either overall or for its variable components. The contract with
which calls for annual financial statements to be published
Mr Overath does limit the various fixed and variable components.
within 90 days of the reporting date. In future the Company
The contribution towards health insurance is not capped in terms
will also comply with this aspect of Recommendation 7.1.2 DCGK.
of amount, but limited to half the maximum levels in statutory health and care insurance. In addition to the fixed and variable
The remuneration of the Supervisory Board has been set out in
components in his pay, Mr Overath is entitled to receive an appro-
the Articles of Association of Deutsche Office. Unlike Recom-
priate special bonus for outstanding performance. This is to be
mendation 5.4.6 DCGK, no separate remuneration is awarded
granted at the reasonable discretion of the Supervisory Board, and
for chairing or serving on committees. The Company’s Supervi-
to date the Supervisory Board has not set a cap for the amount.
sory Board is composed of six members, all of whom are heav-
As the key components of the remuneration are either subject to
ily involved in the Company’s affairs and all of whom serve on
maximum limits or to be determined by the Supervisory Board, it
at least one committee. Under these circumstances, the Super-
is the view of the Supervisory Board, with whom the responsibil-
visory Board believes it is appropriate to dispense with any fur-
ity therefore lies, that capping the overall amount is unnecessary.
ther differentiation based on work in committees.
The contract with Mr von Cramm is based on his previous contract with Prime Office REIT-AG, which was merged with the Company.
The recommendation in 5.4.1 DCGK on an age limit for Super-
Due to the specific circumstances resulting from the merger, no
visory Board members was not initially observed at the time the
cap was introduced for one variable component of the remunera-
shares were admitted to trading in January 2014 because the
tion or for the total remuneration. Compliance with Recommen-
Company had seen no need for this prior to the IPO. However, in
dation 4.2.3 DCGK within the framework of future contract negoti-
January 2014, at the first meeting of the Supervisory Board after
ations is being examined by the Supervisory Board in conjunction
shares began trading, the Supervisory Board included this item
with the development of variable pay components for Executive
when adopting its Rules of Procedure, so that since this date
Board members. In keeping with Recommendation 4.2.5 DCGK, the
the Company has complied with Recommendation 5.4.1 DCGK.”
Company intends to provide additional details about remuneration, on the basis of the recommended model tables, in its Remu-
THE FUNCTIONING OF THE EXECUTIVE BOARD
neration Reports from fiscal year 2014 onwards.
AND THE SUPERVISORY BOARD The Executive Board and Supervisory Board work together closely in a spirit of trust to promote the interests of the Company. To this end, the Supervisory Board and Executive Board maintain regular contact and foster a detailed exchange.
DO DEUTSCHE OFFICE AG
2014 ANNUAL REPORT
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126
CORPORATE GOVERNANCE REPORT STATEMENT OF CORPORATE GOVERNANCE PURSUANT TO SECTION 289A GERMAN COMMERCIAL CODE
The aim is to ensure the long-term existence of Deutsche Office
Some Executive Board decisions are of such significance or
and sustainable generation of value. In line with the statutory
weight that they require the approval of the Supervisory Board.
requirements for German stock companies, Deutsche Office
Executive Board transactions requiring approval are set out in
operates a two-tier system of management. This safeguards a
the Rules of Procedure for the Executive Board.
functional separation between those responsible for managing the Company and those responsible for monitoring their
THE FUNCTIONING OF THE SUPERVISORY BOARD
activities.
The Supervisory Board appoints, monitors and advises the Executive Board. The Executive Board involves the Supervisory Board
THE FUNCTIONING OF THE EXECUTIVE BOARD
directly in any decisions of fundamental importance for the
Since the merger between Prime Office REIT-AG and OCM German
Company. Decisions of this nature require the approval of the
Real Estate Holding AG, Deutsche Office has been managed by
Supervisory Board.
an Executive Board composed of two members. Their functional competences have been defined as follows:
The terms of office for members of the Supervisory Board are as follows: Messrs Hermann T. Dambach, Uwe E. Flach,
ALEXANDER VON CRAMM
Caleb Kramer, Edward P. Scharfenberg and Nebil Senman will
Financing, controlling and accounting, investor relations, IT & risk
serve on the Supervisory Board of the Company until 2017.
management, compliance, legal affairs & tax
Professor Dr Harald Wiedmann’s term of office ends in 2019.
JÜRGEN OVERATH
In order to fulfil its tasks, the Supervisory Board must adopt its
Asset, property & lease management, technical management,
own Rules of Procedure and create committees composed of its
and acquisitions & disposals
members. Under its current Rules of Procedure, the Supervisory Board of Deutsche Office has established the following commit-
The members of the Executive Board jointly bear independent
tees with a view to increasing the efficiency of the work of the
responsibility for the Company. Their managerial remit includes
Supervisory Board and addressing complex issues: the Executive
the definition of corporate objectives, the strategic direction
Committee, the Nomination Committee, the Audit Committee,
of the Company, its management, monitoring, planning and
and the Property and Financing Committee.
financing. • The Executive Committee is responsible for consulting and The tasks of the Executive Board are set out in detail in the Rules
decision-making in time-sensitive matters unless the law pro-
of Procedure for the Executive Board.
vides otherwise. It is also responsible for ongoing coordination with and advice to the Executive Board, and for prepar-
The Executive Board of Deutsche Office consults the Supervisory
ing meetings of the Supervisory Board wherever the scope and
Board regularly about the Company’s strategic direction and
significance of the agenda items make this appropriate. The
ensures its implementation. To this end, the Executive Board regu-
Chairman’s Committee is also responsible for drawing up and
larly reports on the status of implementation and target achieve-
signing the Executive Board members’ employment contracts,
ment. The Executive Board of Deutsche Office informs the Super-
which are based on decisions taken by the full Supervisory
visory Board regularly, promptly and in detail about all issues
Board with regard to each separate Executive Board member.
relevant to operational progress, financial status, earnings, plan-
The Executive Committee consists of Hermann T. Dambach
ning, target achievement, risk exposure and risk management.
(Chairman), Uwe E. Flach and Caleb Kramer.
It describes and puts forward explanations for any deviations in business performance from planning and defined objectives.
DO DEUTSCHE OFFICE AG
2014 ANNUAL REPORT
CORPORATE GOVERNANCE REPORT STATEMENT OF CORPORATE GOVERNANCE PURSUANT TO SECTION 289A GERMAN COMMERCIAL CODE
• The Nomination Committee prepares personnel decisions to
The Supervisory Board reviews the efficiency of its own activi-
be taken by the Supervisory Board, in particular in the context
ties and the independence of its members. The members of the
of proposals from the Supervisory Board to the Annual General
Supervisory Board must immediately disclose any conflicts of
Meeting. The Committee is composed of Hermann T. Dambach
interest to the Supervisory Board. In its Report to the General
(Chairman), Uwe E. Flach and Caleb Kramer.
Meeting, the Supervisory Board details any conflicts of interest that have emerged and explains how they have been dealt with.
• The Audit Committee prepares the Supervisory Board’s decisions on the approval of the annual financial statements and
REMUNERATION OF THE EXECUTIVE BOARD
the contracts with the certified auditors, analyses the Compa-
AND THE SUPERVISORY BOARD
ny’s risk management and advises the Supervisory Board on
The remuneration system for the Executive Board and the Super-
how the risk management can be further enhanced. The Audit
visory Board of Deutsche Office is described in the Remuneration
Committee consists of Prof. Dr Harald Wiedmann (Chairman),
Report for fiscal year 2014, which is an integral part of the Man-
Uwe E. Flach and Nebil Senman.
agement Report.
• The Property and Financing Committee confers with the Execu-
KEY MANAGEMENT PRACTICES
tive Board on potential targets, the terms for purchases or sales of properties or investments, the financing structure of the
COMPLIANCE
Company, financing targets and the criteria for property pur-
Compliance serves to ensure adherence with laws and regula-
chases or sales. As set out in the Executive Board’s Rules of Pro-
tions. Under the German Corporate Governance Code, it is the
cedure, the committee participates in the approval of trans-
task of the Executive Board to ensure compliance with legal pro-
actions that require approval by the Supervisory Board. The
visions. The Board therefore promotes compliance with the law
Property and Financing Committee consists of Hermann T. Dam-
among all employees of Deutsche Office and engages in direct
bach (Chairman), Nebil Senman and Edward P. Scharfenberg.
exchange with staff to this end, since the reputation of the Company and the trust of shareholders, tenants and business partners
The Merger Integration Committee’s role was to support the
depends of the employees of Deutsche Office. With this in mind,
Supervisory Board in its task of advising the Executive Board on
Deutsche Office has designed a compliance system and adopted a
the integration of the merged companies. This called for harmo-
code of conduct that among other things spells out key principles.
nisation between the two corporate structures and the formulation of consistent standards for the purchase, financing, man-
Compliance falls under the responsibility of Executive Board
agement, monitoring and disposal of properties, along with the
member Alexander von Cramm. He is responsible for monitor-
related reporting, communications and publications. The Merger
ing and ensuring respect for the compliance rules. Breaches are
Integration Committee was composed of Hermann T. Dambach
not tolerated but fully investigated and punished. Apart from
(chair), Uwe E. Flach and Nebil Senman. As the integration of the
disciplinary measures, non-compliance with the law can result
former Prime Office REIT-AG into Deutsche Office at the Cologne
in the termination of contracts, claims for damages and crimi-
site was completed faster than expected, the Supervisory Board
nal prosecution.
decided at its meeting on 20 May 2014 to dissolve the Merger Integration Committee initially formed to support progress.
The Executive Board can also discuss compliance issues with the Audit Committee of the Supervisory Board.
The ad hoc Capital Increase Committee, composed of Messrs Hermann T. Dambach (chair), Uwe E. Flach and Nebil Senman, was similarly no longer required once the transaction had been effectively concluded in February 2014.
DO DEUTSCHE OFFICE AG
2014 ANNUAL REPORT
127
128
CORPORATE GOVERNANCE REPORT STATEMENT OF CORPORATE GOVERNANCE PURSUANT TO SECTION 289A GERMAN COMMERCIAL CODE
DIRECTORS’ DEALINGS
When communicating with the public, Deutsche Office adheres
Section 15a of the German Securities Trading Act requires per-
to the principles of timeliness, transparency and openness, sus-
sons discharging managerial responsibilities within an issuer of
tainability, intelligibility and equal treatment of shareholders.
financial instruments to disclose their personal transactions in
All releases and information are also published in English.
shares of the issuer and financial instruments based on them, especially derivatives, to the issuer and to the German Financial
The Company website publishes detailed information about the
Supervisory Authority (BaFin). This duty of disclosure applies to
Company, its properties and its portfolio, in particular corpo-
the members of the Executive Board and the Supervisory Board
rate news and press releases, financial reports and the finan-
as well as to other senior executives of Deutsche Office who have
cial calendar with all key corporate dates. The website also
regular access to insider information about the Company and
offers detailed information about the share, price movements
are empowered to make significant managerial decisions. The
and director’s dealings, i. e. the purchase or sale of shares in the
duty of disclosure also applies to persons closely associated with
Company or related financial instruments as set out in Section
these senior executives and to legal entities in which these sen-
15a of the German Securities Trading Act (WpHG).
ior executives or persons closely associated with them discharge managerial responsibilities or which are controlled by them.
FINANCIAL REPORTING AND AUDITS In addition to the annual financial statements as required under
The following director’s dealings within the meaning of Sec-
Sections 264 et seqq. of the German Commercial Code (HGB),
tion 15a of the German Securities Trading Act took place in fiscal
Deutsche Office prepares consolidated annual financial state-
year 2014: On 11 February 2014, Executive Board member Jürgen
ments in line with the International Financial Reporting Stand-
Overath acquired 3,512 shares in Deutsche Office by exercising
ards (IFRS) pursuant to Sections 290 et seqq. HGB in conjunction
pre-emptive rights under the Company’s capital increase. The
with Section 315a HGB. During the year, Deutsche Office pub-
transaction amounted to EUR 9,833.60 and was made over the
lishes quarterly financial reports and an IFRS-compliant half-
counter at a price of EUR 2.80. Supervisory Board member Prof. Dr
yearly financial report.
Harald Wiedmann acquired 32,000 shares in Deutsche Office on 18 February 2014; the transaction amounted to EUR 90,944 and
The HGB-compliant annual financial statements and the IFRS-
was carried out on XETRA at a price of EUR 2.842.
compliant consolidated financial statements are audited by the auditor appointed by resolution at the Annual General Meet-
SHARES HELD BY THE EXECUTIVE BOARD AND
ing. The Supervisory Board furthermore examines the annual
SUPERVISORY BOARD
and consolidated financial statements, the half-yearly financial
On 10 March 2015 Executive Board member Jürgen Overath held
statements and the quarterly reports.
a total of 13,612 shares in Deutsche Office. Prof. Dr Harald Wiedmann is a member of the Supervisory Board and on 10 March
Ernst & Young GmbH, Wirtschaftsprüfungsgesellschaft, Stuttgart,
2015 he held a total of 64,000 shares in Deutsche Office.
was appointed as the Company’s auditor at the Annual General Meeting on 20 May 2014. The auditors participate in meetings of
CORPORATE COMMUNICATIONS
the Audit Committee to examine the individual and annual finan-
Deutsche Office regularly informs its shareholders, representa-
cial statements, where they present the key audit results.
tives of the press and the interested public about the status of the Company and major business developments. This is done mainly via corporate news and press releases, ad hoc releases, quarterly and half-yearly reports as well as annual financial
March 2015
statements. Apart from the Annual General Meeting, the Company also hosts analyst meetings and press conferences.
DO DEUTSCHE OFFICE AG
2014 ANNUAL REPORT
The Executive Board
The Supervisory Board
CORPORATE GOVERNANCE REPORT REMUNERATION REPORT (PART OF THE COMBINED MANAGEMENT REPORT)
REMUNERATION REPORT
Consequently, the annual remuneration consists as a minimum
(part of the Combined Management Report)
of the fixed component of EUR 336,000 and may increase by a maximum of EUR 175,000 as a result of the STI and by a maxi-
REMUNERATION OF MEMBERS OF THE EXECUTIVE BOARD
mum of EUR 150,000 as a result of the LTI. This means that the
The remuneration of each Executive Board member at Deutsche
EUR 325,000 cap on variable remuneration is always lower than
Office is founded exclusively on his employment contract. Execu-
the fixed remuneration of EUR 336,000 and that the sustainable
tive Board remuneration consists of a fixed component and a
components (fixed remuneration and LTI), amounting to at least
variable component. The calculation of individual performance-
EUR 336,000 and at most EUR 486,000, will at all events clearly
related pay also takes into account the requirement for appro-
outweigh the short-term incentive of at most EUR 175,000. More-
priate remuneration. Furthermore, at its meeting on 10 Decem-
over, 30 percent of the STI will be retained for at least two years
ber 2014, the Supervisory Board examined the relationship
and will not be paid out if there is a significant deterioration in
between the remuneration of the Executive Board and the remu-
business performance, unless the deterioration was beyond the
neration of senior executives and of the Company’s staff as a
control of Mr Overath. In the final analysis, nearly one-third of
whole, including relevant differentiation criteria and changes
the short-term incentive is linked to the long-term performance
occurring over time.
of the Company.
The employment contract concluded with Mr Jürgen Overath
In addition to the fixed and variable remuneration, the Super-
provides for both a fixed annual component of EUR 336,000 and
visory Board can grant appropriate special payments for out-
an annual performance-related component consisting of a short-
standing performance.
term incentive (STI) with a one-year assessment basis and a longterm incentive (LTI) with an assessment basis extending over four
In December 2006, prior to the merger, the Company’s original
fiscal years. The STI amounts to EUR 125,000 for a target achieve-
shareholders made a contractual commitment to Mr Jürgen
ment of 100 percent and is capped in the event of over-achieve-
Overath that he would receive a performance-related bonus if
ment at EUR 175,000. No STI will be paid if the overall target
more than 50 percent of the shares held in the Company by
achievement for the year falls below 70 percent. 70 percent of
partners in OCM were to be sold. Any charge deriving from this
the STI is paid out immediately after the adoption of the audited
commitment will be borne exclusively by the original sharehold-
financial statements for the calendar year concerned. Another
ers and partners.
10 percent is paid out two years later, and a further 20 percent at the end of three years, as long as the Company’s commercial
Alexander von Cramm was not employed by the Company until
position has not deteriorated by these points in time to such a
the merger became effective. In the run-up to the merger, on
degree that the Supervisory Board is entitled to curtail remuner-
7 August 2013, the Company – acting through its Supervisory
ation in keeping with Section 87(2) of the Stock Corporation Act.
Board – signed an employment contract with Mr von Cramm, subject to the condition precedent that the merger would
The LTI is granted after four years and annually thereafter. Jürgen
become effective. This employment contract essentially reflects
Overath’s LTI is calculated on the basis of an initial amount of
the contract previously concluded with Prime Office REIT-AG, and
EUR 50,000. This amount increases or decreases in line with
for this reason, the contract and the remuneration for which it
funds from operations (FFO) per share, net asset value (NAV) per
provides differ from the provisions in the employment contract
share and the Company’s share price during the four years pre-
with Mr Overath.
ceding payment. If these figures fall, the amount decreases, and if they fall by 35 percent or more, the LTI will not be granted at all. If the figures rise, the amount increases up to a maximum of EUR 150,000.
DO DEUTSCHE OFFICE AG
2014 ANNUAL REPORT
129
130
CORPORATE GOVERNANCE REPORT REMUNERATION REPORT (PART OF THE COMBINED MANAGEMENT REPORT)
The contract provides for a fixed annual salary of EUR 240,000,
units is based on the average price of the Company’s share in
along with a payment of EUR 30,000 earmarked for a retirement
the three months preceding the end of the vesting period, and
pension in the place of a company retirement scheme and a car
must not be more than 100 percent greater than the share price
allowance of EUR 12,000.
at the date of vesting. The amount paid out depends on two independent performance levers (FFO per Company share and
Mr von Cramm furthermore receives a variable pay compo-
performance of the Company’ share price), which can trigger
nent equating to 0.5 percent of the funds from operations (FFO)
an increase or decrease in the number of PSUs and can hence
earned by the Company during the fiscal year. If he underper-
also reflect negative trends. There is no cap on any increase in
forms, the Supervisory Board can reduce this component to
the number of PSUs.
0.4 percent of FFO, whereas if he overperforms, the amount can be increased to a maximum of 0.6 percent of FFO.
The table below shows the number of performance share units (PSUs) vested under the long-term incentive scheme, the per-
Mr von Cramm also participates in a long-term incentive
formance share units still outstanding at 31 December 2014 and
scheme, under which Mr von Cramm is granted 15,000 perfor-
the reference share price. The PSUs issued at the IPO were paid
mance share units (PSUs) each year, which are paid out in cash
out in January 2015, and the PSUs awarded in 2011 will be paid
following a vesting period of three years. The pay-out for these
out in March 2015.
REFERENCE SHARE PRICE
PERFORMANCE VESTING PERIOD
PERFORMANCE SHARE UNITS (PSU)
STARTS
ENDS
BASIC QUANTITY
MARK-UP FROM PERFORMANCE LEVERS
PSU (IPO)
6.20
01/07/11
30/06/14
8,000
1,760
PSU (2011)
4.35
31/12/11
31/12/14
7,500
750
PSU (2012)
3.24
31/12/12
31/12/15
15,000
PSU (2013)
3.09
31/12/13
31/12/16
15,000
PSU (Bonus 2013)
3.09
31/12/13
31/12/16
31,736
PSU (2014)
2.93
31/12/14
31/12/17
15,000 92,236
DO DEUTSCHE OFFICE AG
2014 ANNUAL REPORT
CORPORATE GOVERNANCE REPORT REMUNERATION REPORT (PART OF THE COMBINED MANAGEMENT REPORT)
The Supervisory Board can award a special bonus based on a
recommendations on a severance cap in Section 4.2.3 of the Ger-
previously concluded target agreement or an ex-post bonus in
man Corporate Governance Code. This arrangement continues
recognition of outstanding performance.
to apply, notwithstanding a number of clarifications with regard to the nature of a change in control. Under this arrangement, if
COMMITMENTS UPON TERMINATION OF OFFICE
Mr von Cramm’s role on the Executive Board were to end prema-
Jürgen Overath: In the event that Mr Overath’s employment
turely without good cause (i. e. grounds justifying termination
contract is terminated prematurely without Mr Overath per-
of the contract), severance payments to Mr von Cramm would
sonally giving good cause for such termination, the contract
be capped at an amount equivalent to his annual remuneration
entitles Mr Overath to an amount equal to his annual remuner-
for two years and not more than the gross payments that would
ation for two years, but not more than the gross payments that
have been paid until the contract expired. This arrangement also
would have been paid until the contract expired. In the event of
applies in the event of a change in control, although the sever-
a change in control, Mr Overath is entitled to terminate his con-
ance cap in this case is set at 150 percent of the severance cap
tract, and if he exercises this right, he will receive a severance
that would otherwise apply upon premature termination of his
payment equal to his annual remuneration for three years, but
Executive Board role, but shall still not amount to more than the
not more than the gross payments that would have been paid
gross payments that would have been paid until the contract
until the contract expired.
expired. In the event of a change in control, Mr Overath is entitled to terminate his contract, and upon exercise of this right, the
Alexander von Cramm: In keeping with his previous contractual
severance arrangement outlined above will apply.
arrangements with Prime Office REIT-AG, Mr von Cramm’s employment contract sets out an arrangement that limits his severance
No pension commitments have been made to the members of
pay if his appointment ends prematurely, in compliance with the
the Executive Board.
DO DEUTSCHE OFFICE AG
2014 ANNUAL REPORT
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132
CORPORATE GOVERNANCE REPORT REMUNERATION REPORT (PART OF THE COMBINED MANAGEMENT REPORT)
REMUNERATION OF EXECUTIVE BOARD MEMBERS IN FISCAL YEAR 2014 The total remuneration for the Executive Board members amounted to EUR 1,284 k in the past fiscal year and can be broken down as follows: ALEXANDER VON CRAMM EXECUTIVE BOARD
BENEFITS GRANTED IN EUR K
Total fixed remuneration and fringe benefits Fixed remuneration Fringe benefits Total one-year variable remuneration
JÜRGEN OVERATH EXECUTIVE BOARD
2013 1
2014 2
2014 (MIN)
2014 (MAX)
2013 3
2014
2014 (MIN)
2014 (MAX)
252
252
252
252
287
336
336
336
240
240
240
240
287
336
336
336
12
12
12
12
–
–
–
–
160
233
187
280
115
283
0
175
One-year variable remuneration (2013)
–
–
–
–
115
–
–
–
One-year variable remuneration (2014)
–
233
187
280
–
175
0
175
160
–
–
–
–
108
0
–
147
44
0
0
50
100
0
300
Special bonus Total multiple-year variable remuneration LTI (PSU 2013) (3 years)
147
–
–
–
–
–
–
–
LTI (PSU 2014) (3 years)
–
44
0
–
–
–
–
–
LTI (2013) (4 years)
–
–
–
–
–
–
–
–
LTI (2014) (4 years)
–
–
–
–
–
50
0
150
LTI (PSU scheme) (4 years)
–
–
–
–
50
50
0
150
559
529
439
532
452
719
336
811
30
30
30
30
6
6
6
6
589
559
469
562
457
725
342
817
Total fixed and variable remuneration Pension costs Total remuneration
Data based on total remuneration in 2013 as Executive Board member of PO REIT AG, since appointment to Executive Board of Deutsche Office only took effect upon the date of the merger (21 January 2014). The information has been provided on a voluntary basis. Data based on total remuneration for 2014 including remuneration for January 2014 as Executive Board member of PO REIT. 3 Data based on total remuneration for 2013 including remuneration as Managing Director of German Acorn Real Estate GmbH until 30 September 2013, and from 1 October to 31 December 2013 as Executive Board member of Deutsche Office. The fixed remuneration of EUR 203 k and the variable remuneration of EUR 35 k have been reported on a voluntary basis. 1
2
The minimum and maximum amounts of the one-year variable
Mr Overath has undertaken to contribute EUR 25 k of this
remuneration for Mr von Cramm are based on the FFO earned
amount to the existing profit-sharing scheme for employees
in 2014, and they reflect the range specified in the employment
(PSU scheme). This amount has been matched by the Company,
contract from 0.4 percent (for under-performance) to 0.6 per-
so that an initial sum of EUR 50 k is available for the PSU scheme,
cent (for over-performance).
and the special bonus of EUR 108 k can be paid out immediately. The PSU scheme essentially mirrors the long-term incentive
In view of the successful completion of the merger with
scheme for Jürgen Overath described above and will similarly
PO REIT and Mr Overath’s over-performance, the Supervisory
run for four years.
Board granted Mr Overath a special bonus of EUR 133 k for 2014.
DO DEUTSCHE OFFICE AG
2014 ANNUAL REPORT
CORPORATE GOVERNANCE REPORT REMUNERATION REPORT (PART OF THE COMBINED MANAGEMENT REPORT)
The total cash payments made to the Executive Board members in the past fiscal year amounted to EUR 864 k and can be broken down as follows: ALEXANDER VON CRAMM EXECUTIVE BOARD
ALLOCATIONS IN EUR K
Total fixed remuneration and fringe benefits Fixed remuneration Fringe benefits Total one-year variable remuneration
JÜRGEN OVERATH EXECUTIVE BOARD
2013 1
2014 2
2013 3
2014
252
252
287
336
240
240
287
336
12
12
–
–
113
160
185
80
One-year variable remuneration (2012)
113
–
150
–
One-year variable remuneration (2013)
–
160
35
80
365
412
472
416
30
30
6
6
395
442
478
422
Total fixed and variable remuneration Pension costs Total remuneration
Data based on allocations in 2013 as Executive Board member of PO REIT AG, since appointment to Executive Board of Deutsche Office only took effect upon the date of the merger (21 January 2014). The information has been provided on a voluntary basis). 2 Data based on allocations in 2014 incl. allocations in January 2014 as Executive Board member of PO REIT. 3 Data based on allocations in 2013 incl. allocations as Managing Director of German Acorn Real Estate GmbH until 30 September 2013, and from 1 October to 31 December 2013 as Executive Board member of Deutsche Office. 1
D&O INSURANCE
remuneration will double from the beginning of the following
The Company has taken out D&O liability insurance for the
fiscal year. If a member of the Supervisory Board only exercises
members of its governing bodies. In fiscal 2014, the insurance
the function for part of a fiscal year, this remuneration will be
premium amounted to EUR 83 k.
disbursed on a pro-rata basis.
REMUNERATION OF MEMBERS OF THE SUPERVISORY BOARD
The members of the Supervisory Board are reimbursed upon
With effect from the merger on 21 January 2014, when the Com-
production of receipts for any appropriate expenses and for any
pany’s Articles of Association entered into force, every member
value-added tax levied on their pay and expenses, provided that
of the Supervisory Board receives a fixed sum of EUR 20,000
members of the Supervisory Board are entitled to invoice value-
as remuneration for every full fiscal year in which he serves on
added tax separately and exercise this right.
the Supervisory Board. The Chairman of the Supervisory Board receives twice the amount granted as fixed remuneration to
No member of the Supervisory Board has concluded a service
a member of the Supervisory Board, and the Deputy Chair-
agreement with any company in the Deutsche Office Group
man of the Supervisory Board receives one and a half times
that would trigger particular benefits upon termination of the
the amount. If the indicator “Funds from Operations (FFO)”, as
agreement.
reported in the audited Consolidated Financial Statements of the Company or, if the Company is under no obligation to com-
The Company has taken out D&O insurance for the members
pile them, the audited Financial Statements of the Company
of the Supervisory Board to cover them against any claims for
pursuant to Section 325(2)(a) of the German Commercial Code
material damages or liability claims arising from their activities
(HGB), amounts to at least EUR 75,000 k in a fiscal year, this fixed
as Supervisory Board members.
DO DEUTSCHE OFFICE AG
2014 ANNUAL REPORT
133
134
FINANCIAL CALENDAR
FINANCIAL CALENDAR DATE
13 May 2015
Financial report on the first three months of 2015
3 June 2015
Kempen European Property Seminar, Amsterdam
17 June 2015
Annual General Meeting
1 July 2015
Kepler Cheuvreux Property Conference, Paris
11 August 2015
Financial report on the first nine months of 2015
8 August 2015
EPRA Conference
21 September 2015
Baader Investment Conference, Munich
22 September 2015
Goldman Sachs/Berenberg Confernce, Munich
1 October 2015
SocGen Pan-European Real Estate Conference, London
5-7 October 2015
EXPO REAL, Munich
11 November 2015
Financial report on the first nine months of 2015
November 2015
Commerzbank Real Estate Conference
January 2016
Kepler Cheuvreux Conference, Frankfurt
DO DEUTSCHE OFFICE AG
2014 ANNUAL REPORT
CONTACT AND IMPRINT
CONTACT
IMPRINT
Richard Berg
PUBLISHED BY
Head of Investor Relations &
DO Deutsche Office AG
Corporate Communications
Maarweg 165
Phone +49 (0) 221 88829 160
50825 Cologne
Fax
Germany
+49 (0) 221 88829 199
rberg@deutsche-office.de
Phone +49 (0) 221 88829 100 Fax
+49 (0) 221 88829 199
info@deutsche-office.de www.deutsche-office.de CONCEPT, DESIGN AND IMPLEMENTATION Kirchhoff Consult AG, Hamburg, Germany PRINTED BY omb2 Print GmbH, Munich, Germany PICTURE CREDITS Jan Kocovski, Dreieich, Germany
This Report is available in German and in English. Both language versions are available for downloading at www.deutsche-office.com. This translation of the original German version of the Annual Report has been prepared for the convenience of our Englishspeaking shareholders. The German version is legally binding.
DO DEUTSCHE OFFICE AG 2014 ANNUAL REPORT
DO DEUTSCHE OFFICE AG Maarweg 165 50825 Cologne Germany Phone +49 (0)221 88829 100 Fax +49 (0)221 88829 199 info@deutsche-office.de www. deutsche-office.com